On Consistency of the Omega Ratio with Stochastic Dominance Rules

Bernhard Klar and Alfred Müller

Chapter 14 in Innovations in Insurance, Risk- and Asset Management:Proceedings of the Innovations in Insurance, Risk- and Asset Management Conference, 2018, pp 367-380 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Omega ratios have been introduced in [1] as a performance measure to compare the performance of different investment opportunities. It does not have some of the drawbacks of the famous Sharpe ratio. In particular, it is consistent with first order stochastic dominance. Omega ratios also have an interesting relation to expectiles, which found increasing interest recently as risk measures. There is some confusion in the literature about consistency with respect to second order stochastic dominance. In this paper, we clarify this and extend it to a consistency result with respect to stochastic dominance of order 1 + γ recently introduced in [2] and generalizing the classical concepts of stochastic dominance of first and second order. Several examples illustrate the usefulness of this result. Finally, some consistency results for even more general stochastic dominance rules are shown, including the concept of ϵ-almost stochastic dominance introduced in [3].

Keywords: Insurance; Actuarial Science; Risk Measure; Reinsurance; Copula; Replicating Portfolio; Bayesian Finance; Risk Classification; Stochastic Dominance; Dynamic Hedging; Autoregressive Hidden Markov Models; Exchange-Traded Funds; Uncertainty Quantification; Fixed Income; Stochastic Processes for Finance (search for similar items in EconPapers)
JEL-codes: G22 G32 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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