#08-41
A Martingale Test for Alpha
Dean P. Foster, Robert Stine and H. Peyton Young, December 2008
Abstract: We present a new method for testing whether a fund manager’s track record allows us to
infer that he is able to beat the market with high probability or is just plain lucky. The
test is based on the martingale maximal inequality. Unlike other standard approaches the
test is robust to the assumed distribution of returns while retaining substantial statistical
power. The method is illustrated using stock market data from 1926 to 2007.
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