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A Strategy-Proof Test of Portfolio Returns

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  • H Peyton Young
  • Dean P. Foster
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    Abstract

    Traditional 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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    File URL: http://www.economics.ox.ac.uk/materials/papers/5224/paper557.pdf
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    Bibliographic Info

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 567.

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    Date of creation: 01 Sep 2011
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    Handle: RePEc:oxf:wpaper:567

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    Related research

    Keywords: Excess returns; Martingale maximal inequality; Hypothesis test;

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