A recent paper introduces a new concept to help investors assess managers and trading strategies: the Sharpe Stability Ratio (SSR). See “The Sharpe Stability Ratio:Temporal Consistency of Risk-Adjusted Performance”. This performance metric accounts for the temporal consistency of risk-adjusted returns. An investor, if given two Sharpe ratios with the same value, should choose the one that has more stable characteristics. You should like the persistent Sharpe ratio. This paper treats the Sharpe ratio as a rolling performance measure. It defines stability as the ratio of the mean rolling performance to the heteroskedasticity- and autocorrelation-consistent (HAC) standard deviation.
Using the time-series approach can help analyze point-in-time SR or the probabilistic Sharpe ratio (PSR). Given strong serial correlation in the Sharpe ratio, arising from the rolling average and return consistency, the HAC correction provides a better measure than simply scaling by the standard deviation.
The important issue for investors is to look at persistence and consistency with strategies. This may be the true hallmark of skill.
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