Confidence and Power of the Sharpe Ratio under Multiple Testing

13 Pages Posted: 11 Jun 2018 Last revised: 3 May 2022

See all articles by Marcos Lopez de Prado

Marcos Lopez de Prado

Cornell University - Operations Research & Industrial Engineering; Abu Dhabi Investment Authority; True Positive Technologies

Date Written: January 23, 2019

Abstract

Articles in the financial literature typically estimate the p-value associated with an investment strategy’s performance, without reporting the power of the test used to make that discovery. In this paper I 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 and select investments 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

Suggested Citation

López de Prado, Marcos and López de Prado, Marcos, Confidence and Power of the Sharpe Ratio under Multiple Testing (January 23, 2019). Available at SSRN: https://ssrn.com/abstract=3193697 or http://dx.doi.org/10.2139/ssrn.3193697

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

Abu Dhabi Investment Authority ( email )

211 Corniche Road
Abu Dhabi, Abu Dhabi PO Box3600
United Arab Emirates

HOME PAGE: http://www.adia.ae

True Positive Technologies ( email )

NY
United States

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

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