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Weakening the Gain–Loss-Ratio measure to make it stronger

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  • Voelzke, Jan

Abstract

The Gain–Loss-Ratio, proposed by Bernardo and Ledoit (2000), can either be used as a performance measure on a market with known prices or to derive price intervals in incomplete markets. For both applications, there is a considerable theoretical drawback: it reaches infinity for nontrivial cases in many standard models with continuous probability space. In this paper, a more general ratio is proposed, which includes the original Gain–Loss-Ratio as a limit case. This “Substantial Gain–Loss-Ratio” is applicable in case of continuous probabilities. Additionally, in its function as a performance measure it helps illuminate the source of out-performance that a portfolio reveals.

Suggested Citation

  • Voelzke, Jan, 2015. "Weakening the Gain–Loss-Ratio measure to make it stronger," Finance Research Letters, Elsevier, vol. 12(C), pages 58-66.
    • Handle: RePEc:eee:finlet:v:12:y:2015:i:c:p:58-66
    DOI: 10.1016/j.frl.2014.11.007
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    References listed on IDEAS

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    1. John H. Cochrane & Jesus Saa-Requejo, 2000. "Beyond Arbitrage: Good-Deal Asset Price Bounds in Incomplete Markets," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 79-119, February.
    2. Massimiliano Caporin & Grégory M. Jannin & Francesco Lisi & Bertrand B. Maillet, 2014. "A Survey On The Four Families Of Performance Measures," Journal of Economic Surveys, Wiley Blackwell, vol. 28(5), pages 917-942, December.
    3. Dybvig, Philip H & Ingersoll, Jonathan E, Jr, 1982. "Mean-Variance Theory in Complete Markets," The Journal of Business, University of Chicago Press, vol. 55(2), pages 233-251, April.
    4. Antonio E. Bernardo & Olivier Ledoit, 2000. "Gain, Loss, and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 144-172, February.
    5. Rodríguez Longarela Iñaki, 2003. "A Simple Linear Programming Approach to Gain, Loss and Asset Pricing," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-10, January.
    6. Alexander Cherny & Dilip Madan, 2009. "New Measures for Performance Evaluation," Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2371-2406, July.
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    Cited by:

    1. Caporin, Massimiliano & Costola, Michele & Jannin, Gregory & Maillet, Bertrand, 2018. "“On the (Ab)use of Omega?”," Journal of Empirical Finance, Elsevier, vol. 46(C), pages 11-33.
    2. Jan Voelzke & Sebastian Mentemeier, 2017. "Computing the Substantial-Gain-Loss-Ratio," CQE Working Papers 5917, Center for Quantitative Economics (CQE), University of Muenster.
    3. Voelzke, Jan & Gößling, Fabian & Diesteldorf, Jeanne & Weigt, Till, 2017. "Investors' favourite - A different look at valuing individual labour income," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168065, Verein für Socialpolitik / German Economic Association.
    4. Jan Voelzke & Sebastian Mentemeier, 2019. "Computing the Substantial-Gain–Loss-Ratio," Computational Economics, Springer;Society for Computational Economics, vol. 54(2), pages 613-624, August.
    5. Marcelo Brutti Righi, 2021. "Star-shaped acceptability indexes," Papers 2110.08630, arXiv.org, revised Jun 2022.
    6. Jan Voelzke & Jeanne Diesteldorf & Fabian Goessling & Till Weigt, 2017. "Investors' favourite - A different look at valuing individual labour income," CQE Working Papers 6017, Center for Quantitative Economics (CQE), University of Muenster.
    7. Jan Voelzke & Fabian Goessling, 2016. "Should We Like it? - A Social Welfare Based Quantification of Policy Attractiveness," CQE Working Papers 5716, Center for Quantitative Economics (CQE), University of Muenster.
    8. J. Voelzke, 2016. "Individual labour income, stock prices and whom it may concern," Applied Economics Letters, Taylor & Francis Journals, vol. 23(13), pages 965-968, September.

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    More about this item

    Keywords

    Gain–Loss-Ratio; Acceptability index; Incomplete markets; Good-Deal bounds;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G19 - Financial Economics - - General Financial Markets - - - Other

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