A Markov Test for Alpha
Alpha 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.
|Date of creation:||01 Sep 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Manor Rd. Building, Oxford, OX1 3UQ|
Web page: http://www.economics.ox.ac.uk/
More information through EDIRC
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.
When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:568. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Monica Birds)
If references are entirely missing, you can add them using this form.