ProbSharpeRatio: Probabilistic Sharpe Ratio

In PerformanceAnalytics: Econometric Tools for Performance and Risk Analysis

Description

Given a predefined benchmark Sharpe ratio,the observed Sharpe Ratio can be expressed in probabilistic terms known as the Probabilistic Sharpe Ratio. PSR provides an adjusted estimate of SR, by removing the inflationary effect caused by short series with skewed and/or fat-tailed returns and is defined as the probability of the observed sharpe ratio being higher than the reference sharpe ratio.

Usage

ProbSharpeRatio(
  R = NULL,
  Rf = 0,
  refSR,
  p = 0.95,
  weights = NULL,
  n = NULL,
  sr = NULL,
  sk = NULL,
  kr = NULL,
  ignore_skewness = FALSE,
  ignore_kurtosis = TRUE
)

Arguments

R	an xts, vector, matrix, data frame, timeSeries or zoo object of the returns input
Rf	the risk free rate
refSR	a single value or a vector when R is multicolumn. It defines the reference Sharpe Ratio and should be in the same periodicity as the returns (non-annualized).
p	the confidence level
weights	(if R is multicolumn and the underlying assets form a portfolio) the portfolio weights
n	(if R is NULL) the track record length of the returns
sr	(if R is NULL) the sharpe ratio of the returns
sk	(if R is NULL) the skewness of the returns
kr	(if R is NULL) the kurtosis of the returns
ignore_skewness	If TRUE, it ignores the effects of skewness in the calculations
ignore_kurtosis	If TRUE, it ignores the effects of kurtosis in the calculations

Value

A list containing the below

• The probability that the observed Sharpe Ratio is higher than the reference one

• The p-level confidence interval of the Sharpe Ratio

Author(s)

Tasos Grivas <[e-mail]>, Pulkit Mehrotra

References

Marcos Lopez de Prado. 2018. Advances in Financial Machine Learning (1st ed.). Wiley Publishing.

Examples

data(edhec)
ProbSharpeRatio(edhec[,1],refSR = 0.23) 
ProbSharpeRatio(refSR = 1/12^0.5,Rf = 0,p=0.95,sr = 2/12^0.5,sk=-0.72,kr=5.78,n=59)

### Higher moments are data intensive, kurtosis shouldn't be used for short timeseries
ProbSharpeRatio(edhec[,1:2],refSR = c(0.28,0.24), ignore_skewness = FALSE, ignore_kurtosis = FALSE)
ProbSharpeRatio(edhec[,1:2],refSR = c(0.28,0.24), ignore_skewness = FALSE, ignore_kurtosis = TRUE)
ProbSharpeRatio(edhec[,1:2],refSR = c(0.28,0.24), ignore_skewness = TRUE, ignore_kurtosis = TRUE)

ProbSharpeRatio(edhec[,1:2],refSR = 0.26,weights = c(0.5,0.5), 
                ignore_skewness = FALSE, ignore_kurtosis = FALSE)

PerformanceAnalytics documentation built on Feb. 6, 2020, 5:11 p.m.