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Robust performance hypothesis testing with the Sharpe ratio
 ISSN 09275398. doi: http://dx.doi.org/10.1016/j.jempfin.2008.03. 002. URL http://www.ledoit.net/jef2008_abstract.htm
, 2008
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Testing Efficient Risk Sharing with Heterogeneous Risk Preferences ∗
"... Previous papers have tested efficient risk sharing under the assumption of identical risk preferences. In this paper we show that, if in the data households have heterogeneous risk preferences, the tests proposed in the past reject efficiency even if households share risk efficiently. To address thi ..."
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Cited by 31 (0 self)
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Previous papers have tested efficient risk sharing under the assumption of identical risk preferences. In this paper we show that, if in the data households have heterogeneous risk preferences, the tests proposed in the past reject efficiency even if households share risk efficiently. To address this issue we propose a method that enables one to test efficiency even when households have different preferences for risk. The method is composed of three tests. The first one can be used to determine whether in the data under investigation households have homogeneous risk preferences. The second and third test can be used to evaluate efficient risk sharing when the hypothesis of homogeneous risk preferences is rejected. We use this method to test efficient risk sharing in rural India. Using the first test, we strongly reject the hypothesis of identical risk preferences. We then test efficiency with and without the assumption of preference homogeneity. In the first case we reject efficient risk sharing at the village and caste level. In the second case we still reject efficiency at the village level, but we cannot reject this hypothesis at the caste level. This finding suggests that the relevant risksharing unit in rural India is the caste and not the village. 1
Forecast Evaluation of Explanatory Models of Financial Variability. Economics – The OpenAccess, OpenAssessment EJournal 3. Available via: http://www.economicsejournal.org/economics
, 2009
"... A practice that has become widespread and widely endorsed is that of evaluating forecasts of financial variability obtained from discrete time models by comparing them with highfrequency ex post estimates (e.g. realised volatility) based on continuous time theory. In explanatory financial variabili ..."
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Cited by 11 (8 self)
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A practice that has become widespread and widely endorsed is that of evaluating forecasts of financial variability obtained from discrete time models by comparing them with highfrequency ex post estimates (e.g. realised volatility) based on continuous time theory. In explanatory financial variability modelling this raises several methodological and practical issues, which suggests an alternative approach is needed. The contribution of this study is twofold. First, the finite sample properties of operational and practical procedures for the forecast evaluation of explanatory discrete time models of financial variability are studied. Second, based on the simulation results a simple but general framework is proposed and illustrated. The illustration provides an example of where an explanatory model outperforms realised volatility ex post.
Automated Model Selection in Finance: GeneraltoSpecific Modelling of the Mean and Volatility Specifications
 Department of Economics, University of Oxford
, 2012
"... Abstract GeneraltoSpecific (GETS) modelling has witnessed major advances over the last decade thanks to the automation of multipath GETS specification search. However, several scholars have argued that the estimation complexity associated with financial models constitutes an obstacle to multipa ..."
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Cited by 8 (4 self)
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Abstract GeneraltoSpecific (GETS) modelling has witnessed major advances over the last decade thanks to the automation of multipath GETS specification search. However, several scholars have argued that the estimation complexity associated with financial models constitutes an obstacle to multipath GETS modelling in finance. Making use of a recent result on logGARCH Models, we provide methods and develop a simple but general and flexible algorithm that automates financial multipath GETS modelling. Starting from a general model where the mean specification can contain autoregressive (AR) terms and explanatory variables, and where the exponential variance specification can include logARCH and logGARCH terms, an asymmetry term, Bernoulli jumps and other explanatory variables, the algorithm we propose returns parsimonious mean and variance specifications, and a fattailed distribution of the standardised error if normality is rejected. The finite sample properties of the methods and of the algorithm are studied by means of extensive Monte Carlo simulations, and three empirical applications suggest the methods and algorithm are very useful in practice. JEL Classification: C32, C51, C52, C53, E44, E47, G17
Technical trading revisited: False discoveries, persistence tests, and transaction costs
 Journal of Financial Economics
, 2012
"... a b s t r a c t We revisit the apparent historical success of technical trading rules on daily prices of the Dow Jones Industrial Average index from 1897 to 2011, and we use the false discovery rate (FDR) as a new approach to data snooping. The advantage of the FDR over existing methods is that it ..."
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Cited by 6 (1 self)
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a b s t r a c t We revisit the apparent historical success of technical trading rules on daily prices of the Dow Jones Industrial Average index from 1897 to 2011, and we use the false discovery rate (FDR) as a new approach to data snooping. The advantage of the FDR over existing methods is that it selects more outperforming rules, which allows diversifying against model uncertainty. Persistence tests show that, even with the more powerful FDR technique, an investor would never have been able to select ex ante the future bestperforming rules. Moreover, even insample, the performance is completely offset by the introduction of low transaction costs. Overall, our results seriously call into question the economic value of technical trading rules that has been reported for early periods. & 2012 Elsevier B.V. All rights reserved. Introduction Whether technical trading rules can consistently generate profits, as opposed to just being lucky every now and then, is the subject of an ongoing debate. Practitioners have devoted significant resources to technical trading, which uses past price and volume data to infer future prices. A substantial segment of the investment industry employs indicators that include moving averages, support and resistance levels, and other filter rules. Technical indicators are as ubiquitous on professional information systems as on popular finance websites and online retail brokers. In spite of its popularity among practitioners, academics have long been skeptical about the merits of technical analysis. $ We would like to thank the editor and the referee for constructive criticism and numerous suggestions that have lead to substantial improvements over previous versions of the paper. We are grateful to M. FransciniScaillet for helping us to get the data on fund structure costs and futures trading costs via her industry contacts. We thank L. Barras, I.
One Swallow Doesn’t Make a Summer: New Evidence on Anchoring Effects,” American Economic Review,
, 2014
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Do Bidders in Canadian Treasury Bill Auctions Have Private Values?
, 2008
"... We exploit a unique feature of data from Canadian treasury bill auctions, in which some bidders have information about rivals’ bids, to develop a test if values are private. Information about a rival’s bid causes a bidder to bid differently when she has a private value than when her value depends on ..."
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Cited by 6 (1 self)
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We exploit a unique feature of data from Canadian treasury bill auctions, in which some bidders have information about rivals’ bids, to develop a test if values are private. Information about a rival’s bid causes a bidder to bid differently when she has a private value than when her value depends on rivals ’ information. In a divisible good setting, such as treasury bill auctions, bidders with private values who obtain information about rivals ’ bids use this information only to update their prior about the distribution of residual supply. In the model with interdependent (or common) values, they also update their prior about the value of the good being auctioned. We use these differential updating effects to construct our test. We cannot reject the null hypothesis of private values in our data for 3months treasury bills, but we reject private values for 12months treasury bills. Furthermore, we use the estimated model to quantify the value of customer order flow to a dealer. We find that the extra information contained in customers’ bids leads on average to an increase in payoff equal to about 0.5 of a basis point, or 32 % of the expected surplus of dealers from participating in these auctions.
Informational Advantage and Information Structure: An Analysis of Canadian Treasury Auctions ∗
, 2010
"... Several important auction settings, including treasury auctions in Canada and the U.S., have the feature that some bidders (dealers) observe the bids of a subset of other bidders (customers). Quantifying the economic advantage that informationally advantaged bidders derive from this institutional fe ..."
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Cited by 4 (2 self)
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Several important auction settings, including treasury auctions in Canada and the U.S., have the feature that some bidders (dealers) observe the bids of a subset of other bidders (customers). Quantifying the economic advantage that informationally advantaged bidders derive from this institutional feature requires that we empirically distinguish between private vs. interdependent values paradigms. Bidders with private values who obtain information about rivals ’ bids use this information to update their beliefs about the distribution of residual supply. With interdependent values, bidders also update their beliefs about the value of the good being auctioned. We use these differential updating effects to construct formal hypothesis tests of the presence of private vs. interdependent values. Using data from Canadian treasury auctions, we cannot reject the null hypothesis of private values in auctions of 3 and 12month treasury bills. We also do not find evidence supporting the alternative hypothesis of interdependent values. We use the estimated model to quantify the value of observing customer bids to a dealer. We find that the extra information contained in customers ’ bids leads on average to an increase in payoff equal to 13 − 35 % of the expected surplus of dealers.
Bootstrap sequential tests to determine the stationary units in a panel. METEOR Research Memorandum 11/003
, 2011
"... We propose an approach to investigate the stationarity properties of individual units in a panel based on testing userdefined increasing proportions of hypothesized stationary units sequentially. Asymptotically valid critical values are obtained using the block bootstrap. This sequential approach ..."
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Cited by 3 (2 self)
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We propose an approach to investigate the stationarity properties of individual units in a panel based on testing userdefined increasing proportions of hypothesized stationary units sequentially. Asymptotically valid critical values are obtained using the block bootstrap. This sequential approach has an advantage over multiple testing approaches, in particular ifN is large and T is small, as it can exploit the crosssectional dimension, which the multiple testing approaches cannot do effectively. A simulation study is conducted to analyze the relative performance of the approach in comparison with multiple testing approaches. The method is also illustrated by two empirical applications, in testing for unit roots in real exchange rates and log earnings data of households. The simulation study and applications demonstrate the usefulness of our method, in particular in panels with large N and small T.
2011): “Testing for Common Values in Canadian Treasury Bill Auctions,” Discussion paper, Stanford Instititute for Economic Policy Research
"... This work is distributed as a Discussion Paper by the ..."
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This work is distributed as a Discussion Paper by the