[R-SIG-Finance] ks test to compare manager alphas.

Chiquoine, Ben BChiquoine at tiff.org
Wed Dec 22 19:01:03 CET 2010


Eric and Pat,

Thanks for the suggestions. I found the paper by Wolfe and Wunderli to be very clearly written and easy to understand however I'm not sure it's the right answer to my problem. I hadn't intended the ks test to be  a tool which would tell me which managers were the best. What I was actually looking for was a test to see which managers were similar and which were different.  This could provide a useful answer to questions like "Do I really want to invest with a new manager whose returns are extremely similar to a manger that is already in my portfolio?" and "Are a managers claims that they are different from other managers w/ the same strategy enforced by examining the historical return distributions?" My guess is that the ks test's indifference to the correlation between two managers may make it less useful than I'd hoped but anecdotal evidence based on 100 months of historical return data seems to suggest that it may have some value.

Thanks,

Ben
 
-----Original Message-----
From: Eric Zivot [mailto:ezivot at u.washington.edu] 
Sent: Tuesday, December 21, 2010 12:46 PM
To: 'Patrick Burns'; r-sig-finance at r-project.org; Chiquoine, Ben
Subject: RE: [R-SIG-Finance] ks test to compare manager alphas.

A better method would be to use the bootstrap technique described by Wolfe
and Wunderli. This explicitly controls for the issue of multiple testing.
Similar techniques for controlling data snooping biases are implemented
ttrTest package. 
http://www.iew.uzh.ch/wp/iewwp445.pdf


-----Original Message-----
From: r-sig-finance-bounces at r-project.org
[mailto:r-sig-finance-bounces at r-project.org] On Behalf Of Patrick Burns
Sent: Tuesday, December 21, 2010 1:38 AM
To: r-sig-finance at r-project.org; BChiquoine at tiff.org
Subject: Re: [R-SIG-Finance] ks test to compare manager alphas.

I think there are some practical problems.

The ks.test will test if funds are different.
It doesn't really test if one fund is better
than the other.

For the data that you are likely to have, I
doubt you have much power.  I would try
simulating with some known distributions to
see how much power there is.

On 20/12/2010 21:04, Chiquoine, Ben wrote:
> Hi,
>
> I've recently discovered ks.test() in the stats package.  I'd like to
apply it to alphas generated by hedge fund managers. I have several years of
monthly excess returns for each manager and I'd like to see which come from
distributions that are not statistically different.  I have two questions
for the group.  The first question is whether the KS test is valid for two
returns series which are likely not iid?  I think I read that as long as the
difference in empirical distributions functions (ecdf) is iid from the true
distribution (which I don't know) the test is valid.  My second question is
more focused on R.  ks.test gives me the source code for the R function but
there are several calls to C code within the function.  I'm wondering if
there is any way to view the source for the C functions?  I've searched R
help for an answer to this less finance related question but only found one
post in which they said the source could be found in a file called ks.c.
Unfortunately
 I!
>    can't find this file on my hard drive or on the web.  Any help this
group can offer is greatly appreciated.
>
> Thanks,
>
> Ben
>
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-- 
Patrick Burns
patrick at burns-stat.com
http://www.burns-stat.com
http://www.portfolioprobe.com/blog
twitter: @portfolioprobe

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