New Measures for Performance Evaluation

41 Pages Posted: 8 Jan 2007 Last revised: 28 Apr 2008

See all articles by Alexander S. Cherny

Alexander S. Cherny

Moscow State University

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2007

Abstract

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 indices 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.

JEL Classification: G11, G12, G14

Suggested Citation

Cherny, Alexander S. and Madan, Dilip B., New Measures for Performance Evaluation (January 1, 2007). Available at SSRN: https://ssrn.com/abstract=955472 or http://dx.doi.org/10.2139/ssrn.955472

Alexander S. Cherny (Contact Author)

Moscow State University ( email )

Faculty of Mechanics and Mathematics
Department of Probability Theory
Moscow, 119992
Russia
007 095 939 14 03 (Phone)
007 095 939 14 03 (Fax)

HOME PAGE: http://mech.math.msu.su/~cherny

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2127 (Phone)
301-314-9157 (Fax)

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