Type I and Type II Errors of the Sharpe Ratio under Multiple Testing

Abstract

Articles in financial literature typically estimate the p-value associated with an investment strategy’s performance without reporting the power of the test used to make that discovery. In this article, the author provides analytic estimates to Type I and Type II errors for the Sharpe ratios of investments and derives their familywise counterparts. These estimates allow researchers to carefully design experiments and select investments with high confidence and power.