How the Sharpe Ratio Died, and Came Back to Life

33 Pages Posted: 3 May 2018 Last revised: 29 May 2018

See all articles by Marcos Lopez de Prado

Marcos Lopez de Prado

Cornell University - Operations Research & Industrial Engineering; True Positive Technologies

Date Written: May 3, 2018

Abstract

Selection bias under multiple backtesting makes it impossible to assess the probability that a strategy is false (Bailey et al. [2014]). This has two implications:

1) “Most claimed research findings in empirical Finance are likely false” (Harvey et al. [2016]) 2) Most quantitative firms invest in false positives

Selection bias explains the high rate of failure among quantitative hedge funds: They do not have the technology to distinguish between a true strategy and a false strategy.

The goal of this presentation is to introduce such technology, so that academic journals, regulators and investors may discard false strategies with confidence.

The full paper can be found at https://ssrn.com/abstract=3167017

Keywords: Backtest overfitting, selection bias, multiple testing, quantitative investments, machine learning, financial fraud

JEL Classification: G0, G1, G2, G15, G24, E44

Suggested Citation

López de Prado, Marcos, How the Sharpe Ratio Died, and Came Back to Life (May 3, 2018). Available at SSRN: https://ssrn.com/abstract=3173146 or http://dx.doi.org/10.2139/ssrn.3173146

Marcos López de Prado (Contact Author)

Cornell University - Operations Research & Industrial Engineering ( email )

237 Rhodes Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.orie.cornell.edu

True Positive Technologies ( email )

NY
United States

HOME PAGE: http://www.truepositive.com

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