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New Measures for Performance Evaluation


  • Alexander Cherny
  • Dilip Madan


This paper characterizes performance measures satisfying a set of proposed axioms. We develop four new measures consistent with the axioms and show that they improve on the economic properties of the Sharpe Ratio and the Gain-Loss Ratio. In our treatment, the performance measures, or the indexes of acceptability, are linked to positive expectations resulting from a stressed sampling of the cash-flow distribution. Theoretically, it is shown that the level of acceptability varies directly with the amount of stress tolerated. In an empirical application, the performance measures are applied to cash flows generated by writing options on the SPX and the FTSE. This exercise reveals that acceptability levels are U-shaped in the strike direction. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail:, Oxford University Press.

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  • 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.
  • Handle: RePEc:oup:rfinst:v:22:y:2009:i:7:p:2371-2406

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    References listed on IDEAS

    1. Campbell, John Y., 1987. "Stock returns and the term structure," Journal of Financial Economics, Elsevier, vol. 18(2), pages 373-399, June.
    2. Solnik, Bruno, 1993. "The performance of international asset allocation strategies using conditioning information," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 33-55, June.
    3. Foster, F Douglas & Smith, Tom & Whaley, Robert E, 1997. " Assessing Goodness-of-Fit of Asset Pricing Models: The Distribution of the Maximal R-Squared," Journal of Finance, American Finance Association, vol. 52(2), pages 591-607, June.
    4. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    5. Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992. " Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," Journal of Finance, American Finance Association, vol. 47(5), pages 1731-1764, December.
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