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Comparing large-sample maximum Sharpe ratios and incremental variable testing
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DOI：10.1016/j.ejor.2017.08.018.png)
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Abstract
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Most existing results on the distribution of the maximum Sharpe ratio depend on the assumption of multivariate normal return distributions. We use recent results from the literature to provide an analytical representation of the distribution of the difference between two maximum Sharpe ratios for much less restrictive distributional assumptions, both with and without short sales. Knowing the distribution of the difference enables us to test ex ante whether or not the inclusion of additional variables leads to a significant improvement in the maximum Sharpe ratio. In addition, we characterize the optimal long-only solution and provide conditions for global optimality. (C) 2017 Elsevier B.V. All rights reserved.
Keywords:
Multivariate statistics
Finance
Maximum Sharpe ratio
Incremental variables
Mean-variance spanning
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