The Deflated Sharpe Ratio: Correcting for Selection Bias, Backtest Overfitting, and Non-Normality

David H. Bailey, Marcos López de Prado · 2014 · The Journal of Portfolio Management

IntermediateAny horizonMethodFree to read

Adjusts a backtest's Sharpe ratio for the number of variants tried, skew and fat tails. Tells you whether your best variant is just luck.

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At a glance

Level: Intermediate: Comfortable with statistics, regressions and basic probability models
Horizon: Any horizon
Data needed: None to read it; no dataset required Set what data you have
Themes: Backtesting
Assets: Equities
Market: Global

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Cite

@article{bailey2014deflated,
  author = {Bailey, David H. and López de Prado, Marcos},
  title = {{The Deflated Sharpe Ratio: Correcting for Selection Bias, Backtest Overfitting, and Non-Normality}},
  journal = {The Journal of Portfolio Management},
  year = {2014},
  doi = {10.3905/jpm.2014.40.5.094}
}

Bailey, D. H., & López de Prado, M. (2014). The Deflated Sharpe Ratio: Correcting for Selection Bias, Backtest Overfitting, and Non-Normality. The Journal of Portfolio Management. https://doi.org/10.3905/jpm.2014.40.5.094