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Related Experiment Videos

A note on trader Sharpe Ratios.

John M Coates1, Lionel Page

  • 1Judge Business School, University of Cambridge, Cambridge, United Kingdom. jmc98@cam.ac.uk

Plos One
|December 1, 2009
PubMed
Summary
This summary is machine-generated.

Experienced traders achieve higher Sharpe Ratios than the broad market, challenging the Efficient Market Hypothesis. Learning and trading experience, not prenatal androgen exposure (2D:4D ratio), appear to drive these superior risk-adjusted returns.

Related Experiment Videos

Area of Science:

  • Behavioral finance
  • Financial market efficiency
  • Neuroeconomics

Background:

  • The Sharpe Ratio measures risk-adjusted returns, a key performance metric for traders.
  • The Efficient Market Hypothesis posits that traders cannot consistently outperform the market.
  • Previous research linked prenatal androgen exposure (2D:4D ratio) to trader profitability.

Purpose of the Study:

  • To investigate the average Sharpe Ratio among experienced traders in the City of London.
  • To test whether the 2D:4D ratio predicts traders' Sharpe Ratios or risk-taking.
  • To explore the impact of trading experience on traders' Sharpe Ratios.

Main Methods:

  • Empirical study of experienced traders in the City of London.
  • Calculation of Sharpe Ratios and analysis of risk-taking behavior.
  • Statistical examination of the correlation between 2D:4D ratio, trading experience, and financial performance.

Main Results:

  • Experienced traders demonstrated significantly higher Sharpe Ratios than the broad market.
  • The 2D:4D ratio predicted the amount of risk taken but not the Sharpe Ratio.
  • Traders' Sharpe Ratios increased substantially with years of trading experience.

Conclusions:

  • Findings contradict the Efficient Market Hypothesis by showing outperformance in experienced traders.
  • Learning and accumulated trading experience are key factors in enhancing trader returns.
  • The 2D:4D ratio is not a predictor of risk-adjusted trading performance.