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

Marcos López de Prado
The Journal of Portfolio Management November 2022, jpm.2022.1.403; DOI: https://doi.org/10.3905/jpm.2022.1.403
Marcos López de Prado
is global head of quantitative research and development at Abu Dhabi Investment Authority in Abu Dhabi, United Arab Emirates, and a professor of practice at Cornell University in Ithaca, NY
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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.

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The Journal of Portfolio Management: 49 (3)
The Journal of Portfolio Management
Vol. 49, Issue 3
February 2023
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Type I and Type II Errors of the Sharpe Ratio under Multiple Testing
Marcos López de Prado
The Journal of Portfolio Management Jul 2022, jpm.2022.1.403; DOI: 10.3905/jpm.2022.1.403

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Type I and Type II Errors of the Sharpe Ratio under Multiple Testing
Marcos López de Prado
The Journal of Portfolio Management Jul 2022, jpm.2022.1.403; DOI: 10.3905/jpm.2022.1.403
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  • Article
    • Abstract
    • REVIEW OF THE RELEVANT LITERATURE
    • CONTRIBUTIONS OF THIS ARTICLE
    • FAMILYWISE ERROR RATE
    • ŠIDÁK’S CORRECTION
    • TYPE I ERRORS UNDER MULTIPLE TESTING
    • TYPE II ERRORS UNDER MULTIPLE TESTING
    • THE INTERACTION BETWEEN TYPE I AND TYPE II ERRORS
    • CONCLUSIONS
    • REFERENCES
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  • PDF (Subscribers Only)

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