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Omega Portfolio Construction with Johnson Distributions

Author

Listed:
  • Alexander Passow

    (GOTTEX and FAME)

Abstract

The Omega performance measure is equiped with the original family of Johnson distributions. Explicit representations for Omega or Sharpe with all four Johnson cumulated densities were derived to construct portfolios with respect to 4 mutually independent moments. Additionally, decompositions of higher portfolio moments were derived to include expected higher moments on an individual fund or strategy level. Hedge fund index back-testing has shown that Johnson-Omega gives significantly higher returns without sacrificing capital protection needs. Omega with Johnson distributions solves the weaknesses from Sharpe and achieves a more predictable and stable performance by exploiting the persistence of potentially significant higher moments up to fourth order.

Suggested Citation

  • Alexander Passow, 2004. "Omega Portfolio Construction with Johnson Distributions," FAME Research Paper Series rp120, International Center for Financial Asset Management and Engineering.
    • Handle: RePEc:fam:rpseri:rp120
    as

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    File URL: http://www.swissfinanceinstitute.ch/rp120.pdf
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    Citations

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    Cited by:

    1. N. Naguez & J. L. Prigent, 2017. "Optimal portfolio positioning within generalized Johnson distributions," Quantitative Finance, Taylor & Francis Journals, vol. 17(7), pages 1037-1055, July.
    2. Eric Benhamou & Beatrice Guez & Nicolas Paris1, 2019. "Omega and Sharpe ratio," Papers 1911.10254, arXiv.org.
    3. repec:ipg:wpaper:2014-510 is not listed on IDEAS

    More about this item

    Keywords

    Sharpe; Omega; Johnson distribution; Skewness; Higher Moments; Significant Moments; Portfolio Construction; Hedge Funds; Market Neutral;
    All these keywords.

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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