Suppose that I have two long-only portfolio construction strategies and that I backtest both of them on the same data. If I wanted to find out whether one of these methods would have outperformed the market, then I would regress the resulting excess returns of that method against the excess returns of the market and look at Jensen's alpha.

How would I compare (using econometric methods) whether one strategy outperforms the other? Would it make sense to regress one against the other and test whether the intercept is different from $0$?

  • 2
    $\begingroup$ The problem with regressing one strategy against the other is that the results are not symmetric if you reverse the strategies. So I don't recommend that method. I prefer comparing both against the market and seeing which outperforms the market more (and is the difference significant). $\endgroup$
    – noob2
    Sep 6 '16 at 16:35
  • $\begingroup$ @noob2 So running a regression of the return of one method excess the other against the market excess the risk free asset and testing whether that intercept is positive would be justifiable? $\endgroup$
    – Calculon
    Sep 6 '16 at 16:42
  • $\begingroup$ Seems OK, but I let's see first what answers other people come up with. $\endgroup$
    – noob2
    Sep 6 '16 at 17:29

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