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Say I have a market-making strategy that trades intraday. I start with a flat position and finish flat too. I end up with a daily P&L $p_{today}$. Over a year of trading I get $\vec{p} = (p_1,\dots,p_{252})$.

There is no way to calculate returns here. As such I calculate $$Sharpe = S(\vec{p}) = \sqrt{252} \cdot \frac{\mathbb{E}[\vec{p}]}{\sqrt{\mathbb{V}[\vec{p}]}} = \sqrt{252} \cdot \frac{mean(p)}{sd(p)}$$

My questions are :

  1. Am I right to do it like this?
  2. Do you usually bootstrap your Sharpe? (I do not but I am interested in your view of it.)
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Why is there no way to calculate returns? What about $(p_{i+1}-p_i)/p_i$? –  Anna Jan 27 at 22:05
The returns here have nothing to do with pnl, please avoid downvoting without reading properly the post –  statquant Jan 27 at 22:59
I would like to understand the question. Why is there no way to calculate returns? Could you explain that in your question please? –  Anna Jan 28 at 7:31
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1 Answer

There is no way to calculate returns here.

Let me stop you right there. You didn't open a brokerage account with zero dollars. The money you put-up for margin is your starting position. After a year of trading, you have a stopping position represented by a different amount of money in your account. The change from your starting position to your stopping is your return.

Am I right to do it like this?

Your formula for annualized Sharpe ratio is correct, assuming you didn't introduce more margin into your brokerage account to do bigger trades. For a fair comparison using P&L, you must have the same amount of capital that you started with.

Do you usually bootstrap your Sharpe?

I've never heard of resampling applied to performance metrics like this. At least not by industry practitioners.

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Not sure what you really mean by "You did not open a brokerage..." as a practictioner I do not open anything. I start flat I use some capital provided by the firm, and I end up flat at the end of the day. It doesn't make sense (should you even find a way) to calculate return in that case I think. –  statquant Nov 19 '13 at 14:31
@statquant How much capital did the firm have at the end of the day? More? Less? How does your employer determine your compensation? –  chrisaycock Nov 19 '13 at 15:00
Sorry I don't get what you are saying, can you show me how you would calculate the return (I think you'll see the problem then) –  statquant Nov 19 '13 at 15:04
@statquant Let's say your firm posts \$10M with the prime broker. And let's say the firm's P&L at the end of the year is \$1M. That's a 10% return. As I stated in my first paragraph above, returns are computed based on the capital under management. If your employer felt they could get more than 10% returns from an index fund, then surely they would shut the company down and put that \$10M in an ETF. You personally might not consider returns in that light, but the backers of your firm certainly do. –  chrisaycock Nov 19 '13 at 15:26
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