Performance Evaluation of Market Timers
Alex Kane, Stephen Gary Marks
NBER Working Paper No. 2640
Previous investigators have shown that the Sharpe measure of the performance of a managed portfolio may be flawed when the portfolio manager has market timing ability. We develop the exact conditions under which the Sharpe measure will completely and correctly order market timers according to ability. The derived conditions are necessary, sufficient, and observable. We compare them to empirical estimates of actual market conditions, and find that the circumstances which can lead to a failure of the Sharpe measure do in fact occur. We show, however, that such failures can be greatly reduced by more frequent sampling.
Document Object Identifier (DOI): 10.3386/w2640
Published: Kane, Alex and Stephen Gary Marks. "Performance Evaluation of Market Timers: Theory and Evidence," from Journal of Financial and Quantitative Analysis, Vol. 23, No. 4, December 1988, pp. 425-435.