Conditional Sharpe Ratios

Victor Chow and Christine W. Lai

Finance Research Letters, 2015, vol. 12, issue C, 117-133

Abstract: Facing investment choices, investors may care more about potentially excess losses in a downtrend market than excess gains in an upside market. Conditional Sharpe ratios (CSR) are statistical ordinates of conditional stochastic dominance (CSD) that measure lower partial risk-adjusted excess returns of an asset with respect to return distribution on the benchmark. A multiple comparison of serial CSR statistics thus provides an overall view of portfolio performance corresponding to different market scenarios. An example demonstrates that CSR is able to discriminate funds’ downside performance which the conventional Sharpe ratio generally fails to do. A large out-of-sample analysis of US mutual fund shows that CSR has predictability for portfolio future performance.

Keywords: Sharp ratio; Information ratio; Conditional Sharpe ratio; Portfolio choice; Down-side risk; Conditional stochastic dominance (search for similar items in EconPapers)
JEL-codes: G10 G11 G20 G23 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:12:y:2015:i:c:p:117-133

DOI: 10.1016/j.frl.2014.11.001

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