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

Author

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  • Jan Voelzke

Abstract

The Gain-Loss-Ratio, proposed by Bernardo and Ledoit (2000), evaluates the attractiveness of an investment opportunity for an investor with a given stochastic discount factor. It 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 so-called "Substantial Gain-Loss-Ratio" is applicable in case of continuous probabilities. In addition, in its function as a performance measure it helps illuminate the source respectively the distribution of out-performance, that a portfolio reveals.

Suggested Citation

  • Jan Voelzke, 2014. "Weakening the Gain-Loss-Ratio measure to make it stronger," CQE Working Papers 3114, Center for Quantitative Economics (CQE), University of Muenster.
  • Handle: RePEc:cqe:wpaper:3114
    as

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    File URL: https://www.wiwi.uni-muenster.de/cqe/sites/cqe/files/CQE_Paper/CQE_WP_31_2014.pdf
    File Function: Version of June, 2014
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    References listed on IDEAS

    as
    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. 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.
    4. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Gain-loss ratio; acceptability index; incomplete markets; good-deal bounds;

    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

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