A Markov Test for Alpha
AbstractAlpha is the amount by which the returns from a given asset exceed the returns from the wider market.� The standard way of estimating alpha is to correct for correlation with the market by regressing the asset's returns against the market returns over an extended period of time and then apply the t-test to the intercept.� The difficulty is that the residuals often fail to satisfy independence and normality; in fact, portfolio managers may have an incentive to employ strategies whose residuals depart by design from independence and normality.� To address these problems we propose a robust test for alpha based on the Markov inequality.� Since it is based on the compound value of the estimated excess returns, we call it the compound alpha test (CAT).� Unlike the t-test, our test places no restrictions of returns while retaining substantial statistical power.� The method is illustrated on the distribution for three assets: a stock, a hedge fund, and a fabricated fund that is deliberately designed to fool standard tests of significance.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 568.
Date of creation: 01 Sep 2011
Date of revision:
Alpha; Markov inequality; Hypothesis test;
Find related papers by JEL classification:
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hulebak, Karen, 2001. "Risk Management," Agricultural Outlook Forum 2001 33049, United States Department of Agriculture, Agricultural Outlook Forum.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Caroline Wise).
If references are entirely missing, you can add them using this form.