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Multiple tests for the performance of different investment strategies

Author

Listed:
  • Frahm, Gabriel
  • Wickern, Tobias
  • Wiechers, Christof

Abstract

In the context of modern portfolio theory, we compare the out-of-sample performance of 8 investment strategies which are based on statistical methods with the out-of-sample performance of a family of trivial strategies. A wide range of approaches is considered in this work, including the traditional sample-based approach, several minimum-variance techniques, a shrinkage, and a minimax approach. In contrast to similar studies in the literature, we also consider shortselling constraints and a risk-free asset. We provide a way to extend the concept of minimum-variance strategies in the context of short-selling constraints. A main drawback of most empirical studies on that topic is the use of simple-testing procedures which do not account for the effects of multiple testing. For that reason we conduct several hypothesis tests which are proposed in the multiple-testing literature. We test whether it is possible to beat a trivial strategy by at least one of the non-trivial strategies, whether the trivial strategy is better than every non-trivial strategy, and which of the non-trivial strategies are significantly outperformed by naive diversification. In our empirical study we use monthly US stock returns from the CRSP database, covering the last 4 decades.

Suggested Citation

  • Frahm, Gabriel & Wickern, Tobias & Wiechers, Christof, 2010. "Multiple tests for the performance of different investment strategies," Discussion Papers in Econometrics and Statistics 5/10, University of Cologne, Institute of Econometrics and Statistics.
  • Handle: RePEc:zbw:ucdpse:510
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    More about this item

    Keywords

    Asset allocation; Certainty equivalent; Investment strategy; Markowitz; Multiple tests; Naive diversification; Out-of-sample performance; Portfolio optimization; Sharpe ratio;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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