The Hedging Effectiveness of Malaysian Crude Palm Oil Futures: An Application of the Extended Mean-Gini Model

This paper aims to demonstrate the superiority ofExtended Mean-Gini (EMG) framework which is consistent with the second-order ofstochastic dominance theory. The study provides a comprehensive analysis ofinvestors’ distinct risk averse behavior towards optimal futures hedgingstrategy. The empirical distribution function method and the more efficientkernel estimation method are employed in the estimation of EMG hedge ratios.Furthermore, the moving data window procedure is used to examine the stabilityof the dynamic hedge ratios. The research is conducted on Malaysian Crude PalmOil and CPO Futures markets for the period of 16th March 1995 to 28th June2011. The empirical results show that the EMG approach is apparently moreappropriate than the MV approach where EMG framework incorporates the riskaversion factor. The study also shows the instability of dynamic hedge ratiosacross time horizons hence not favorable to investors who adopt the “buy and hold” strategy.