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Conditional Sharpe Ratios

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  • Chow, Victor
  • Lai, Christine W.

Abstract

Facing investment choices, investors may care more about potentially excess losses in a downtrend market than excess gains in an upside market. Conditional Sharpe ratios (CSR) are statistical ordinates of conditional stochastic dominance (CSD) that measure lower partial risk-adjusted excess returns of an asset with respect to return distribution on the benchmark. A multiple comparison of serial CSR statistics thus provides an overall view of portfolio performance corresponding to different market scenarios. An example demonstrates that CSR is able to discriminate funds’ downside performance which the conventional Sharpe ratio generally fails to do. A large out-of-sample analysis of US mutual fund shows that CSR has predictability for portfolio future performance.

Suggested Citation

  • Chow, Victor & Lai, Christine W., 2015. "Conditional Sharpe Ratios," Finance Research Letters, Elsevier, vol. 12(C), pages 117-133.
    • Handle: RePEc:eee:finlet:v:12:y:2015:i:c:p:117-133
    DOI: 10.1016/j.frl.2014.11.001
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    Cited by:

    1. Cumming, Douglas & Schwienbacher, Armin & Zhan, Feng, 2015. "The scope of international mutual fund outsourcing: Fees, performance and risks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 38(C), pages 185-199.
    2. José Soares Fonseca, 2020. "Portfolio selection in euro area with CAPM and Lower Partial Moments models," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 19(1), pages 49-66, January.
    3. Coelho, Vitor N. & Coelho, Igor M. & Coelho, Bruno N. & Cohen, Miri Weiss & Reis, Agnaldo J.R. & Silva, Sidelmo M. & Souza, Marcone J.F. & Fleming, Peter J. & Guimarães, Frederico G., 2016. "Multi-objective energy storage power dispatching using plug-in vehicles in a smart-microgrid," Renewable Energy, Elsevier, vol. 89(C), pages 730-742.
    4. Lu, Jin-Ray & Li, Xiu-Yan, 2021. "Identifying the fair value of Sharpe ratio by an option valuation approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 63-70.
    5. Guo, Biao & Xiao, Yugu, 2016. "A note on why doesn't the choice of performance measure matter?," Finance Research Letters, Elsevier, vol. 16(C), pages 248-254.
    6. Gabriel Frahm & Ferdinand Huber, 2019. "The Outperformance Probability of Mutual Funds," JRFM, MDPI, vol. 12(3), pages 1-29, June.
    7. Diego Víctor de Mingo-López & Juan Carlos Matallín-Sáez & Amparo Soler-Domínguez & Huseyin Ozturk & Emili Tortosa-Ausina, 2023. "Persistence versus mobility of sociallyresponsible funds: intra-distribution dynamics and mobility trends," Working Papers 2023/09, Economics Department, Universitat Jaume I, Castellón (Spain).

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    More about this item

    Keywords

    Sharp ratio; Information ratio; Conditional Sharpe ratio; Portfolio choice; Down-side risk; Conditional stochastic dominance;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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