Performance Evaluation of Market Timers
University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS)
Stephen Gary Marks
Boston University - School of Law
NBER Working Paper No. w2640
Previous investigators have shown that the Sharpe measure of the performance of a managed portfolio may be flawed when the portfolio manager has market timing ability. We develop the exact conditions under which the Sharpe measure will completely and correctly order market timers according to ability. The derived conditions are necessary, sufficient, and observable. We compare them to empirical estimates of actual market conditions, and find that the circumstances which can lead to a failure of the Sharpe measure do in fact occur. We show, however, that such failures can be greatly reduced by more frequent sampling.
Number of Pages in PDF File: 21
Date posted: April 11, 2007