Internet Bubble Examination with Mean-Variance Ratio

Zhidong D. Bai, Yongchang C. Hui, Wing Keung Wong

    Research output: Chapter in book/report/conference proceedingChapterpeer-review

    Abstract

    To evaluate the performance of the prospects X and Y, financial professionals are interested in testing the equality of their Sharpe ratios (SRs), the ratios of the excess expected returns to their standard deviations. Bai et al. (Statistics and Probability Letters 81, 1078–1085, 2011d) have developed the mean-varianceratio (MVR) statistic to test the equality of their MVRs, the ratios of the excess expected returns to its variances. They have also provided theoretical reasoning to use MVR and proved that their proposed statistic is uniformly most powerful unbiased. Rejecting the null hypothesis infers that X will have either smaller variance or larger excess mean return or both leading to the conclusion that X is the better investment. In this paper, we illustrate the superiority of the MVR test over the traditional SR test by applying both tests to analyze the performance of the S &P 500 index and the NASDAQ 100 index after the bursting of the Internet bubble in the 2000s. Our findings show that while the traditional SR test concludes the two indices being analyzed to be indistinguishable in their performance, the MVR test statistic shows that the NASDAQ 100 index underperformed the S&P 500 index, which is the real situation after the bursting of the Internet bubble in the 2000s. This shows the superiority of the MVR test statistic in revealing short-term performance and, in turn, enables investors to make better decisions in their investments.

    Original languageEnglish
    Title of host publicationHandbook of Financial Econometrics and Statistics
    EditorsCheng-Few Lee, John C. Lee
    PublisherSpringer New York
    Pages1451-1465
    Number of pages15
    Edition1st
    ISBN (Electronic)9781461477501
    ISBN (Print)9781461477495, 9781461477518
    DOIs
    Publication statusPublished - 9 Aug 2014

    Scopus Subject Areas

    • Economics, Econometrics and Finance(all)
    • Business, Management and Accounting(all)
    • Mathematics(all)

    User-Defined Keywords

    • Mean-variance ratio
    • Sharpe ratio
    • Hypothesis testing
    • Uniformly most powerful unbiased test
    • Internet bubble
    • Fund management

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