Robust Performance Hypothesis Testing with the Sharpe Ratio

Olivier Ledoit and Michael Wolf

No 320, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: Applied researchers often test for the difference of the Sharpe ratios of two investment strategies. A very popular tool to this end is the test of Jobson and Korkie (1981), which has been corrected by Memmel (2003). Unfortunately, this test is not valid when returns have tails heavier than the normal distribution or are of time series nature. Instead, we propose the use of robust inference methods. In particular, we suggest to construct a studentized time series bootstrap confidence interval for the difference of the Sharpe ratios and to declare the two ratios different if zero is not contained in the obtained interval. This approach has the advantage that one can simply resample from the observed data as opposed to some null-restricted data. A simulation study demonstrates the improved finite sample performance compared to existing methods. In addition, two applications to real data are provided.

Keywords: Bootstrap; HAC inference; Sharpe ratio (search for similar items in EconPapers)
JEL-codes: C12 C14 C22 (search for similar items in EconPapers)
Date: 2008-01
New Economics Papers: this item is included in nep-ecm and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (382)

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Journal Article: Robust performance hypothesis testing with the Sharpe ratio (2008)
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