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A performance index consistent with fractional-order stochastic dominance

Author

Listed:
  • Chen, Tzu-Ying
  • Chen, Yi-Ting
  • Huang, Rachel J.
  • Tzeng, Larry Y.

Abstract

We propose a performance index for ranking risky projects, termed the fractional-order Omega. The proposed index is consistent with the fractional-order stochastic dominance in between the first- and the second-order stochastic dominance, and bridges the traditional Omega and the second-order Omega. To illustrate its empirical applicability, we utilize the index to develop a market timing strategy. Empirical results show that the market timing strategy, which aims to maximize the fractional-order Omega ex ante, generally performs well ex post.

Suggested Citation

  • Chen, Tzu-Ying & Chen, Yi-Ting & Huang, Rachel J. & Tzeng, Larry Y., 2025. "A performance index consistent with fractional-order stochastic dominance," Pacific-Basin Finance Journal, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:pacfin:v:93:y:2025:i:c:s0927538x25002288
    DOI: 10.1016/j.pacfin.2025.102891
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    References listed on IDEAS

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    1. Zakamouline, Valeri & Koekebakker, Steen, 2009. "Portfolio performance evaluation with generalized Sharpe ratios: Beyond the mean and variance," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1242-1254, July.
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    5. Alexandros Kostakis & Nikolaos Panigirtzoglou & George Skiadopoulos, 2011. "Market Timing with Option-Implied Distributions: A Forward-Looking Approach," Management Science, INFORMS, vol. 57(7), pages 1231-1249, July.
    6. Jackwerth, Jens Carsten, 2000. "Recovering Risk Aversion from Option Prices and Realized Returns," The Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 433-451.
    7. Bi, Hongwei & Huang, Rachel J. & Tzeng, Larry Y. & Zhu, Wei, 2019. "Higher-order Omega: A performance index with a decision-theoretic foundation," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 43-57.
    8. Homm, Ulrich & Pigorsch, Christian, 2012. "Beyond the Sharpe ratio: An application of the Aumann–Serrano index to performance measurement," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2274-2284.
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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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