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Testing equality of modified Sharpe ratios

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  • Ardia, David
  • Boudt, Kris

Abstract

The modified Sharpe ratio is commonly used to evaluate the risk-adjusted performance of an investment with non-normal returns, such as hedge funds. In this note, a test for equality of modified Sharpe ratios of two investments is developed. A simulation study demonstrates the good size and power properties of the test. An application illustrates the complementarity between the Sharpe ratio and modified Sharpe ratio test for performance testing on hedge fund return data.

Suggested Citation

  • Ardia, David & Boudt, Kris, 2015. "Testing equality of modified Sharpe ratios," Finance Research Letters, Elsevier, vol. 13(C), pages 97-104.
    • Handle: RePEc:eee:finlet:v:13:y:2015:i:c:p:97-104
    DOI: 10.1016/j.frl.2015.02.008
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Bootstrap test; Hedge fund; Modified Sharpe ratio; Non-normal returns; Performance measurement;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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