Confidence and Power of the Sharpe Ratio under Multiple Testing
13 Pages Posted: 11 Jun 2018 Last revised: 28 Feb 2019
Date Written: January 23, 2019
Most papers in the financial literature estimate the p-value associated with an investment strategy, without reporting the power of the test used to make that discovery. In this paper we provide analytic estimates to Type I and Type II errors for the Sharpe ratios of investments, and derive their familywise counterparts. These estimates allow researchers to carefully design experiments with high confidence and power.
Keywords: True positive, false positive, power, significance, recall, multiple testing, non-Normal returns, clustering, machine learning
JEL Classification: G0, G1, G2, G15, G24, E44
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