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Title:Testing for the best alternative with an application to performance measurement PDF Logo
Authors:Frahm, Gabriel
Issue Date:2007
Series/Report no.:Discussion papers in statistics and econometrics 7/07
Abstract:Suppose that we are searching for the maximum of many unknown and analytically untractable quantities or, say, the 'best alternative' among several candidates. If our decision is based on historical or simulated data there is some sort of selection bias and it is not evident if our choice is significantly better than any other. In the present work a large sample test for the best alternative is derived in a rather general setting. The test is demonstrated by an application to financial data and compared with the Jobson-Korkie test for the Sharpe ratios of two asset portfolios. We find that ignoring conditional heteroscedasticity and non-normality of asset returns can lead to misleading decisions. In contrast, the presented test for the best alternative accounts for these kinds of phenomena.
Subjects:Ergodicity
Gordin's condition
heteroscedasticity
Jobson-Korkie test
Monte Carlo simulation
performance measurement
Sharpe ratio
JEL:G10
B28
Document Type:Working Paper
Appears in Collections:Discussion Papers in Statistics and Econometrics, Seminar für Wirtschafts- und Sozialstatistik, Universität Köln

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