sharpeTesting {PeerPerformance} | R Documentation |
Testing the difference of Sharpe ratios
Description
Function which performs the testing of the difference of Sharpe ratios.
Usage
sharpeTesting(x, y, control = list())
Arguments
x |
Vector (of lenght |
y |
Vector (of lenght |
control |
Control parameters (see *Details*). |
Details
The Sharpe ratio (Sharpe 1992) is one industry standard for measuring the absolute risk adjusted performance of hedge funds. This function performs the testing of Sharpe ratio difference for two funds using the approach by Ledoit and Wolf (2002).
For the testing, only the intersection of non-NA
observations for the
two funds are used.
The argument control
is a list that can supply any of the following
components:
-
'type'
Asymptotic approach (type = 1
) or studentized circular bootstrap approach (type = 2
). Default:type = 1
. -
'ttype'
Test based on ratio (type = 1
) or product (type = 2
). Default:type = 2
. -
'hac'
Heteroscedastic-autocorrelation consistent standard errors. Default:hac = FALSE
. -
'nBoot'
Number of boostrap replications for computing the p-value. Default:nBoot = 499
. -
'bBoot'
Block length in the circular bootstrap. Default:bBoot = 1
, i.e. iid bootstrap.bBoot = 0
uses optimal block-length. -
'pBoot'
Symmetric p-value (pBoot = 1
) or asymmetric p-value (pBoot = 2
). Default:pBoot = 1
.
Value
A list with the following components:
n
: Number of non-NA
concordant observations.
sharpe
: Vector (of length 2) of unconditional Sharpe ratios.
dsharpe
: Sharpe ratios difference.
tstat
: t-stat of Sharpe ratios differences.
pval
: pvalues of test of Sharpe ratios differences.
Note
Further details on the methdology with an application to the hedge fund industry is given in in Ardia and Boudt (2018).
Some internal functions where adapted from Michael Wolf MATLAB code.
Author(s)
David Ardia and Kris Boudt.
References
Ardia, D., Boudt, K. (2015). Testing equality of modified Sharpe ratios. Finance Research Letters 13, pp.97–104. doi: 10.1016/j.frl.2015.02.008
Ardia, D., Boudt, K. (2018). The peer performance ratios of hedge funds. Journal of Banking and Finance 87, pp.351-.368. doi: 10.1016/j.jbankfin.2017.10.014
Barras, L., Scaillet, O., Wermers, R. (2010). False discoveries in mutual fund performance: Measuring luck in estimated alphas. Journal of Finance 65(1), pp.179–216.
Sharpe, W.F. (1994). The Sharpe ratio. Journal of Portfolio Management 21(1), pp.49–58.
Ledoit, O., Wolf, M. (2008). Robust performance hypothesis testing with the Sharpe ratio. Journal of Empirical Finance 15(5), pp.850–859.
Storey, J. (2002). A direct approach to false discovery rates. Journal of the Royal Statistical Society B 64(3), pp.479–498.
See Also
sharpe
, sharpeScreening
and
msharpeTesting
.
Examples
## Load the data (randomized data of monthly hedge fund returns)
data("hfdata")
x = hfdata[,1]
y = hfdata[,2]
## Run Sharpe testing (asymptotic)
ctr = list(type = 1)
out = sharpeTesting(x, y, control = ctr)
print(out)
## Run Sharpe testing (asymptotic hac)
ctr = list(type = 1, hac = TRUE)
out = sharpeTesting(x, y, control = ctr)
print(out)
## Run Sharpe testing (iid bootstrap)
set.seed(1234)
ctr = list(type = 2, nBoot = 250)
out = sharpeTesting(x, y, control = ctr)
print(out)
## Run Sharpe testing (circular bootstrap)
set.seed(1234)
ctr = list(type = 2, nBoot = 250, bBoot = 5)
out = sharpeTesting(x, y, control = ctr)
print(out)