Could Omega Ratio Perform Better Than Sharpe Ratio?

Posted: 7 Aug 2019

See all articles by Sheung-Chi Chow

Sheung-Chi Chow

The Hang Seng University of Hong Kong; Hong Kong Baptist University (HKBU)

Richard Lu

Feng Chia University

Wing-Keung Wong

Asia University, Department of Finance

Date Written: August 4, 2019

Abstract

In this paper, we will investigate whether there is any Sharpe ratio rule or Omega ratio rule that can be used to show that one asset outperforms another asset if it has a higher Sharpe ratio and/or Omega ratio. We find that Sharpe ratio rule could not detect preference of both risk averters and risk seekers in some strong dominance cases. We set up the Omega ratio rule and find that the Omega ratio rule is better than the mean-variance rule because the former could the former can detect the first order stochastic dominated asset but the latter cannot. We also show the superiority of the Omega ratio rule over any Sharpe ratio rule by using hedging funds data.

Keywords: stochastic dominance, Omega Ratio, Sharpe ratio, utility

JEL Classification: C0, D81, G10

Suggested Citation

Chow, Sheung-Chi and Lu, Richard and Wong, Wing-Keung, Could Omega Ratio Perform Better Than Sharpe Ratio? (August 4, 2019). Available at SSRN: https://ssrn.com/abstract=3431979

Sheung-Chi Chow

The Hang Seng University of Hong Kong ( email )

Hang Shin Link
Siu Lek Yuen
Shatin, Hong Kong
China

Hong Kong Baptist University (HKBU) ( email )

Department of Economics
Kowloon, Hong Kong
Hong Kong

Richard Lu

Feng Chia University ( email )

100 Wenhwa Road
Talchung
Taiwan

Wing-Keung Wong (Contact Author)

Asia University, Department of Finance ( email )

Taiwan
Taiwan

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