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Model Performance Measures For Leveraged Investors

Author

Listed:
  • CRAIG FRIEDMAN

    (Standard & Poor's, Risk Solutions Group, 55 Water Street, New York, NY 10041, USA;
    New York University, Courant Institute of Mathematical Sciences, USA)

  • SVEN SANDOW

    (Standard & Poor's, Risk Solutions Group, 55 Water Street, New York, NY 10041, USA;
    Polytechnic University, Department of Management, USA)

Abstract

We measure the performance of probabilistic models from a decision-theoretic perspective along the lines of Friedman and Sandow [6]. In particular, we adopt the point of view of an investor who evaluates models based on the test-sample averaged utility of the expected-utility-optimal strategies that the models suggest in the horse race setting. In this paper, we relax the assumptions of Friedman and Sandow [6]: we omit the notion of a "true" measure and we allow our investor to withhold or borrow cash, which widens the range of possible applications. We show that, in this setting, our relative model performance measure is odds-ratio independent if and only if the investor has a generalized logarithmic utility function, in which case it essentially reduces to the likelihood ratio. We also show that for horse races with nearly homogeneous returns, our relative performance measure is approximately equal to the likelihood ratio.

Suggested Citation

  • Craig Friedman & Sven Sandow, 2004. "Model Performance Measures For Leveraged Investors," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 7(05), pages 541-554.
    • Handle: RePEc:wsi:ijtafx:v:07:y:2004:i:05:n:s0219024904002530
    DOI: 10.1142/S0219024904002530
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    Cited by:

    1. Reynolds-Hogland, Melissa J. & Hogland, John S. & Mitchell, Michael S., 2008. "Evaluating intercepts from demographic models to understand resource limitation and resource thresholds," Ecological Modelling, Elsevier, vol. 211(3), pages 424-432.
    2. A. Hoseinzadeh & G. Mohtashami Borzadaran & G. Yari, 2012. "Aspects concerning entropy and utility," Theory and Decision, Springer, vol. 72(2), pages 273-285, February.

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