A Strategy-Proof Test of Portfolio Returns
AbstractTraditional methods for analyzing portfolio returns often rely on multifactor risk assessment, and tests of significance are typically based on variants of the t-test.� This approach has serious limitations when analyzing the returns from dynamically traded portfolios that include derivative positions, because standard tests of significance can be 'gamed' using options trading strategies.� To deal with this problem we propose a test that assumes nothing about the structure of returns except that they form a martingale difference.� Although the test is conservative and corrects for unrealized tail risk, the loss in power is small at high levels of significance.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 567.
Date of creation: 01 Sep 2011
Date of revision:
Excess returns; Martingale maximal inequality; Hypothesis test;
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-09 (All new papers)
- NEP-ECM-2011-10-09 (Econometrics)
- NEP-RMG-2011-10-09 (Risk Management)
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