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Journal of Banking & Finance Vol. 100 2019

Higher-order Omega: A performance index with a decision-theoretic foundation

Hongwei Bi1; Rachel J. Huang2,3; Larry Y. Tzeng4,3; Wei Zhu1

1 University of International Business and Economics · 2 National Central University · 3 National Chengchi University · 4 National Taiwan University

Abstract

This paper proposes a new performance index referred to as the Nth-order Omega that includes the well-known Omega as a special case. The index is established by adopting an approach that is free of a utility functional form or/and distributional assumptions. A decision-theoretic foundation for our index is further established through introducing a new distribution ranking criterion. The index is monotonic with respect to Nth-degree stochastic dominance and offers a complete ordering on gambles. An empirical example of deriving the optimal hedge ratio is demonstrated to show the applicability of the index.

DOI
10.1016/j.jbankfin.2018.12.013
Volume
100
Pages
43-57
Language
en
Sources
crossref openalex bibtex:phds-export.bib

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