Abstract
AbstractThe Omega ratio grants flexibility to a decision‐maker regarding the selection of a return threshold (τ). Although the return threshold can affect the effectiveness of the Omega portfolio, the literature has not soundly concluded how to determine it. In this paper, we develop a multiple objective programming model to generate time‐varying return thresholds by maximizing the τ value and maximizing the deviation between gain and loss, considering short sales and trading costs in portfolio rebalances. The empirical results using the daily returns of the composite stocks in the S&P 500 index over 13 years suggest that the proposed Omega (Max τ) model realizes higher performances than the widely applied portfolio models and the fixed‐τ Omega models under different rebalancing frequencies. The time‐varying return thresholds generated by our model capture the dynamics of the overall market and can be suitable for index enhancement.
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