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Highly Accurate Inference on the Sharpe Ratio for Autocorrelated Return Data

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  • J. Qi
  • M. Rekkas
  • A. Wong

Abstract

Performance measurement is an integral part of investment analysis and risk management. The Sharpe ratio is one of the most prominently used measures of performance of an investment with respect to return and risk. While most of the literature has addressed the large sample properties of the Sharpe ratio, it is important to compare the performance of these methods when only a small sample of observations is available. We propose a third-order asymptotic likelihood-based method to obtain highly accurate inference for the Sharpe ratio when returns are assumed to follow a Gaussian autoregressive process. Through real life examples, we show that results can vary vastly according to the methods used to obtain them. Results from simulation studies illustrate that our proposed method is superior to the existing methods used in the literature even with a very small number of observations.Mathematics Subject Classification: 62P05Keywords: Performance measurement; likelihood based method; Sharpe ratio

Suggested Citation

  • J. Qi & M. Rekkas & A. Wong, 2018. "Highly Accurate Inference on the Sharpe Ratio for Autocorrelated Return Data," Journal of Statistical and Econometric Methods, SCIENPRESS Ltd, vol. 7(1), pages 1-2.
    • Handle: RePEc:spt:stecon:v:7:y:2018:i:1:f:7_1_2
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    References listed on IDEAS

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    1. Fraser, D. A. S., 1988. "Normed likelihood as saddlepoint approximation," Journal of Multivariate Analysis, Elsevier, vol. 27(1), pages 181-193, October.
    2. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    3. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    Cited by:

    1. Eric Benhamou, 2018. "Connecting Sharpe ratio and Student t-statistic, and beyond," Papers 1808.04233, arXiv.org, revised May 2019.
    2. Eric Benhamou, 2021. "Distribution and statistics of the Sharpe Ratio," Working Papers hal-03207169, HAL.

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