Bootstrap With Example.

The following papers give good and simple examples of the use of the bootstrap methods for statistical inference. 1] Vinod, . !. and ". #. "ore$ %&'''( )*onfidence +ntervals and $pothesis Testing for the ,harpe and Tre$nor -erformance "easures. / Bootstrap /pproach,0 in 1. ,. /bu2"ostafa, B. 3eBaron, /. W. 3o and /. ,. Weigend %Ed.s( Computational Finance 1999 "+T -ress, *ambridge "ass., &'''. *hapter 4, pages &5246. &] Vinod, . !. and ". #. "ore$ %&''1( )/ !ouble ,harpe #atio0 in Advances in

Investment Analysis and Portfolio Management, Vol. 7, 3ee, *heng 8ew, %ed.(, 9ew 1or:, &''1, ;/+2Elsevier ,cience pp. 5<=>5.

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/bstracts and Electronic copies of some of m$ recent papers are available on m$ author page at the SSRN Electronic Library at: http://ssrn.com/author=1392 !

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The point of this article is to show that besides ris: associated with the ups and downs of the mar:et, there is also some ris: associated with the fact that the characteristics of the probabilit$ distribution of mar:et returns is not :nown exactl$, but estimated from random data. We suggest a new wa$ of incorporating estimation ris: with an additional denominator to the estimated ,harpe #atio.

We start with some notation from financial economics. 3et

ri ,t represent the excess return from the i2th portfolio in period t, where i ? 1, &, ..., n. / random sample of T excess returns on the n portfolios is then illustrated b$ r @ t = A r1t , r& t ,... rnt ], where t ? 1, &, ..., T and where rt is assumed to be multivariate normal random variable, with mean ? B i C , i ? 1, &, ..., n and a covariance matrix ? % iD ( where i , D = 1, & ,... n . +t is well2:nown that the unbiased estimators of the %n x 1( mean vector and the %n x n( covariance matrix are respectivel$, 1 T r= rt , T t= 1

and , = siD =

{ }

1 T % r r (% rt r (@. T 1 t =1 t

%1(

These two estimators are then used to form the estimators of the traditional ,harpe performance measure. The population value of the ,harpe %16>>( performance measure for portfolio i is defined as ,h i = i , i ? 1, &, ..., n. +t is simpl$ the mean excess return over the standard i

deviation of the excess returns for the portfolio. The conventional sample2based point estimates of the ,harpe performance measure used in %1( are then = ri for i ? 1, &, ..., n. ,h i si

%&(

The ,harpe ratio is defined in eEuation %&( as the ratio of the mean excess return to its standard deviation. We define the !ouble ,harpe ratio b$ !,h i = ,h i , s,h i %4(

where s sh i is the standard deviation of the ,harpe ratio estimate, or the estimation ris:. /s is clear in %4(, the !ouble ,harpe penaliFes a portfolio for higher estimation ris:. Because of the presence of the random denominator si in the definition of %&(, the ,harpe ratio does not permit an eas$ method for evaluating the estimation ris: in the point

estimate itself. This is because the small2sample distribution of the ,harpe measure is non2normal and hence the usual method based on the ratio of the statistic to its standard errors is biased and unreliable. ,ame problem holds for our double ,harpe #atio. What is bootstrap methodolog$G , is based on a sample of siFe, T. +n the bootstrap methodolog$, /ssume a statistic, , one empiricall$ instead of assuming the shape of the sampling distribution of b$ investigating the variation of approximates the entire sampling distribution of over a large number %sa$ 666( of pseudo samples obtained b$ re2sampling the same data. 8or the re2sampling, a "onte2*arlo simulation is used on the available sample values. This is conducted b$ randoml$ drawing, with replacement. We create a large number %666( of resamples of siFe T from the original sample. Each resample has T elements, however an$ given resample could have some of the original data points represented more than once and some not at all. 9ote that, b$ construction, each element of the original sample has the same probabilit$, %1HT(, of being in a sample. Is The initial idea behind bootstrapping was that a relative freEuenc$ distribution of calculated from the resamples can be a good approximation to its sampling distribution. This idea has since been extended to conditional models and one2step conditional moments.1 +n this paper, the resampling for the ,harpe measure is done )with replacement0 of the original excess returns themselves for D ?1,&, J, ; or 666 times. Thus, we calculate 666 ,harpe measures from the original excess return series. The choice of the odd number 666 is convenient, since the ran:2ordered &52th and 6<52th values of estimated

8or example, let bK denote resampled regression coefficients, b the original coefficients, and the un:nown parameters. The extended bootstrap approximates the properties of %b2 ( b$ the observable %bK2 b(. ,ee !avison and in:le$ %166<( for recent references and Vinod %1664( for references to earlier attempts.
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,harpe ratios arranged from the smallest to the largest, $ield a useful 65L confidence interval. +t is from these 666 ,harpe measures that we calculate s sh i .
BOOTSTRAP FOR THE REGRESSION PROB E! $ ? M N with sa$ T?5' observations estimate b b$ O3, and compute the residuals e?$Mb $ ? Mb N reshuffled residuals %with replacement, i.e., with repetition( bootstrap method is to create 666 regression problems. *reate 666 sets of $ data %each with 5' observations( 9ow $ou have 666 regression problems. Estimate some 666 times and find bK estimates. 9ow the sampling distribution approximation is available b$ comparing b is approximated b$ bKb