Confidence and Power of the Sharpe Ratio under Multiple Testing

13 Pages Posted: 11 Jun 2018 Last revised: 28 Feb 2019

See all articles by Marcos Lopez de Prado

Marcos Lopez de Prado

Cornell University - Operations Research & Industrial Engineering; AQR Capital Management, LLC

Michael J. Lewis

True Positive Technologies; New York University (NYU) - Courant Institute of Mathematical Sciences

Date Written: January 23, 2019

Abstract

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

Suggested Citation

López de Prado, Marcos and Lewis, Michael J., 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

AQR Capital Management, LLC

One Greenwich Plaza
Greenwich, CT 06830
United States

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

Michael J. Lewis

True Positive Technologies ( email )

12 East 49th Street, Floor 37
New York, NY 10017
United States

New York University (NYU) - Courant Institute of Mathematical Sciences ( email )

New York University
New York, NY 10012
United States

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