Model Comparison with Sharpe Ratios

51 Pages Posted: 4 Aug 2017 Last revised: 13 Mar 2019

See all articles by Francisco Barillas

Francisco Barillas

University of New South Wales

Raymond Kan

University of Toronto - Rotman School of Management

Cesare Robotti

Imperial College Business School

Jay A. Shanken

Emory University - Goizueta Business School; National Bureau of Economic Research (NBER)

Date Written: March 12, 2019

Abstract

We show how to conduct asymptotically valid tests of model comparison when the extent of model mispricing is gauged by the squared Sharpe ratio improvement measure. This is equivalent to ranking models on their maximum Sharpe ratios, effectively extending the GRS test to accommodate comparison of non-nested models. Mimicking portfolios can be substituted for any nontraded model factors and estimation error in the portfolio weights is taken into account in the statistical inference. A variant of the Fama and French (2018) six-factor model, with a monthly-updated version of the usual value spread, emerges as the dominant model.

JEL Classification: G12, C12, C13

Suggested Citation

Barillas, Francisco and Kan, Raymond and Robotti, Cesare and Shanken, Jay A., Model Comparison with Sharpe Ratios (March 12, 2019). Rotman School of Management Working Paper No. 3013149, Available at SSRN: https://ssrn.com/abstract=3013149 or http://dx.doi.org/10.2139/ssrn.3013149

Francisco Barillas (Contact Author)

University of New South Wales ( email )

College Rd, Kensington
Sydney, 2052
Australia

Raymond Kan

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S3E6
Canada
416-978-4291 (Phone)
416-971-3048 (Fax)

Cesare Robotti

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Jay A. Shanken

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
404-727-4772 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
679
Abstract Views
2,349
rank
41,199
PlumX Metrics