Best Gain Loss Ratio in Continuous Time

The use of gain-loss ratio as a measure of attractiveness has been

introduced by Bernardo and Ledoit. In their well-known paper, they

show that gain-loss ratio restrictions have a dual representation in

terms of restricted pricing kernels.

In spite of its clear financial significance, gain-loss ratio has

been largely ignored in the mathematical finance literature, with few

exceptions (Cherny and Madan, Pinar). The main reason is intrinsic

lack of good mathematical properties. This paper aims to be a

rigorous study of gain-loss ratio and its dual representations

in a continuous-time market setting, placing it in the context of

risk measures and acceptability indexes. We also point out (and

correctly reformulate) an erroneous statement made by Bernardo and

Ledoit in their main result. This is joint work with M. Pinar.