Profiteering from the Internet Bubble by Using Mean-Variance-Ratio Test

Abstract

Bai, et al. (2011d) have developed the mean-variance-ratio (MVR) statistic to test the performance among assets for small samples. They have provided theoretical reasoning to use MVR and proved that their proposed statistic is uniformly most powerful unbiased. In this paper, we illustrate the superiority of the MVR test over the traditional Sharpe ratio (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 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 2000s. This shows the superiority of the MVR test statistic in revealing short term performance and, in turn, enables the investors to make better decisions in their investments.