TITLE:
The Hedging Effectiveness of Malaysian Crude Palm Oil Futures: An Application of the Extended Mean-Gini Model
AUTHORS:
Kin-Boon Tang, Ju-Yau Tarn
KEYWORDS:
Hedging Effectiveness, Crude Palm Oil Futures, Mean-Gini Approach, Financial Risk Management
JOURNAL NAME:
Theoretical Economics Letters,
Vol.8 No.11,
August
22,
2018
ABSTRACT: This paper aims to demonstrate the superiority of
Extended Mean-Gini (EMG) framework which is consistent with the second-order of
stochastic dominance theory. The study provides a comprehensive analysis of
investors’ distinct risk averse behavior towards optimal futures hedging
strategy. The empirical distribution function method and the more efficient
kernel estimation method are employed in the estimation of EMG hedge ratios.
Furthermore, the moving data window procedure is used to examine the stability
of the dynamic hedge ratios. The research is conducted on Malaysian Crude Palm
Oil and CPO Futures markets for the period of 16th March 1995 to 28th June
2011. The empirical results show that the EMG approach is apparently more
appropriate than the MV approach where EMG framework incorporates the risk
aversion factor. The study also shows the instability of dynamic hedge ratios
across time horizons hence not favorable to investors who adopt the “buy and hold” strategy.