PeerPerformance (version 2.2.5)

sharpeTesting: 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 \(T\)) of returns for the first fund. NA values are allowed.

y

Vector (of lenght \(T\)) returns for the second fund. NA values are allowed.

control

Control parameters (see *Details*).

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.

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.

References

Ardia, D., Boudt, K. (2015). Testing equality of modified Sharpe ratios. Finance Research Letters 13, pp.97--104. 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. 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

# NOT RUN {
## 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)
# }