Estimating Future Performance: The Shrinkage-Adjusted Sharpe Ratio

Moshe Levy () and Richard Roll ()
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Moshe Levy: Hebrew University of Jerusalem
Richard Roll: Emeritus, UCLA

Chapter Chapter 4 in Mutual Fund Selection, 2024, pp 53-78 from Springer

Abstract: Abstract Estimation error is a central problem in mutual fund selection: past return parameters are very noisy estimates of the corresponding out-of-sample parameters. Fortunately, statistical “shrinkage” can improve estimation. The shrinkage-adjusted Sharpe ratio (SAS) is based on the prescription that shrinkage should usually be applied to the gross sample returns, but not to fees, which are typically known. The SAS significantly improves out-of-sample performance relative to existing methods.

Keywords: Estimation error; Statistical shrinkage; Fees; Shrinkage-adjusted Sharpe ratio (SAS) (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/978-3-031-69758-6_4

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