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Model comparison with Sharpe ratios
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Barillas, Francisco, Kan, Raymond, Robotti, Cesare and Shanken, Jay (2020) Model comparison with Sharpe ratios. Journal of Financial and Quantitative Analysis, 55 (6). pp. 1840-1874. doi:10.1017/S0022109019000589 ISSN 0022-1090.
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Official URL: http://dx.doi.org/10.1017/S0022109019000589
Abstract
We show how to conduct asymptotically valid tests of model comparison when the extent of model mispricing is gauged by the squared Sharpe ratio improvement measure. This is equivalent to ranking models on their maximum Sharpe ratios, effectively extending the Gibbons, Ross, and Shanken (1989) test to accommodate the comparison of nonnested models. Mimicking portfolios can be substituted for any nontraded model factors, and estimation error in the portfolio weights is taken into account in the statistical inference. A variant of the Fama and French (2018) 6-factor model, with a monthly updated version of the usual value spread, emerges as the dominant model.
Item Type: | Journal Article | ||||||||
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Subjects: | H Social Sciences > HF Commerce H Social Sciences > HG Finance |
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Divisions: | Faculty of Social Sciences > Warwick Business School | ||||||||
Library of Congress Subject Headings (LCSH): | Investment analysis, Rate of return, Financial risk management, Finance -- Mathematical models | ||||||||
Journal or Publication Title: | Journal of Financial and Quantitative Analysis | ||||||||
Publisher: | Cambridge University Press | ||||||||
ISSN: | 0022-1090 | ||||||||
Official Date: | September 2020 | ||||||||
Dates: |
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Volume: | 55 | ||||||||
Number: | 6 | ||||||||
Page Range: | pp. 1840-1874 | ||||||||
DOI: | 10.1017/S0022109019000589 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Reuse Statement (publisher, data, author rights): | This article has been published in a revised form in Journal of Financial and Quantitative Analysis http://dx.doi.org/10.1017/S0022109019000589. This version is free to view and download for private research and study only. Not for re-distribution, re-sale or use in derivative works. © Michael G. Foster School of Business, University of Washington 2019 | ||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||
Copyright Holders: | © Michael G. Foster School of Business, University of Washington 2019 | ||||||||
Date of first compliant deposit: | 17 January 2020 | ||||||||
Date of first compliant Open Access: | 17 January 2020 |
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