A Note on Trader Sharpe Ratios
Paper by John M. Coates, and Lionel Page
Abstract:
Traders in the financial world are assessed by the amount of money they make and, increasingly, by the amount of money they make per unit of risk taken, a measure known as the Sharpe Ratio. Little is known about the average Sharpe Ratio among traders, but the Efficient Market Hypothesis suggests that traders, like asset managers, should not outperform the broad market. Here we report the findings of a study conducted in the City of London which shows that a population of experienced traders attain Sharpe Ratios significantly higher than the broad market. To explain this anomaly we examine a surrogate marker of prenatal androgen exposure, the second-to-fourth finger length ratio (2D:4D), which has previously been identified as predicting a trader’s long term profitability. We find that it predicts the amount of risk taken by traders but not their Sharpe Ratios. We do, however, find that the traders’ Sharpe Ratios increase markedly with the number of years they have traded, a result suggesting that learning plays a role in increasing the returns of traders. Our findings present anomalous data for the Efficient Markets Hypothesis.
Related:
Alpha males must trade on more than machismo By John Coates [FT]
November 25th, 2009 at 10:21 pm
Do you think they adequately controlled for survivorship bias?
November 25th, 2009 at 11:19 pm
I suspect not. The period under review is very short and it is not clear what kind of trading, in term of time horizon, the subject were doing, so the results, however interesting, should to be taken with a pinch of salt, in my view.