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Performance measurement with loss aversion

Author

Listed:
  • Gordon Gemmill

    (Faculty of Finance, Cass Business School)

  • Soosung Hwang

    (Faculty of Finance, Cass Business School)

  • Mark Salmon

    (Faculty of Finance, Cass Business School)

Abstract

This paper explains how prospect theory can be applied to fund performance, extending work by Darsinos and Satchell (Generalising Universal Performance Measures', Risk, 17(6), 80–84, 2004). It then uses data on closed-end funds in the UK to show that the resulting loss-averse performance measure (LAP) gives different rankings from those of conventional measures (such as the Sharpe ratio, Jensen's alpha, the Sortino ratio and the Higher Moment measure). Loss-averse performance has the desirable property of being negatively correlated with the volatility and kurtosis of tracking errors. It is not more closely related to discounts on funds than are conventional measures of performance, however, so no evidence is found that loss-aversion in the short-term is a factor in attracting investors to particular funds.

Suggested Citation

  • Gordon Gemmill & Soosung Hwang & Mark Salmon, 2006. "Performance measurement with loss aversion," Journal of Asset Management, Palgrave Macmillan, vol. 7(3), pages 190-207, September.
    • Handle: RePEc:pal:assmgt:v:7:y:2006:i:3:d:10.1057_palgrave.jam.2240213
    DOI: 10.1057/palgrave.jam.2240213
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    2. Caporin, Massimiliano & Costola, Michele & Jannin, Gregory & Maillet, Bertrand, 2018. "“On the (Ab)use of Omega?”," Journal of Empirical Finance, Elsevier, vol. 46(C), pages 11-33.
    3. Dávid Andor Rácz, 2019. "Comparison of Manipulation-proof Measures on Hungarian Data," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 18(2), pages 31-51.
    4. Zhang, Hanxiong & Auer, Benjamin R. & Vortelinos, Dimitrios I., 2018. "Performance ranking (dis)similarities in commodity markets," Global Finance Journal, Elsevier, vol. 35(C), pages 115-137.
    5. Sharma, Prateek & Vipul,, 2015. "Performance of risk-based portfolios under different market conditions: Evidence from India," Research in International Business and Finance, Elsevier, vol. 34(C), pages 397-411.

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    More about this item

    Keywords

    performance measurement; loss aversion; prospect theory; closed- end-fund puzzle;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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