Deflated Sharpe Ratio (DSR): How Quants Adjust for Multiple Testing Bias [2026]
Date Published
1. The Multiple Testing Dilemma in Finance
Marcos López de Prado's Mathematical Formulation
In algorithmic research, selection bias under multiple testing is the most prevalent cause of false discoveries. DSR computes the probability that the observed Sharpe ratio exceeds what could have been produced by a white noise process after N independent trials.
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