Utility maximizing hedge ratios in the extended mean gini framework

Studies of optimal futures hedging have traditionally aimed either at finding the risk minimizing or the utility maximizing hedge ratio. Most articles in the literature seek the risk minimizing hedge ratio, and the preponderance of this literature focuses on mean-variance risk minimization. The popularity of this approach stems mainly from its simplicity. However, in many cases, assuming that all investors seek to minimize risk is not reasonable, because one intuitively expects that weakly risk averse investors would adopt hedge ratios that differ from those chosen by strongly risk averse investors. On the other hand, utility functions allow hedgers to find the hedge ratio that maximizes utility, not merely the hedge ratio that minimizes risk. However, utility maximizing hedging strategies require the specification of a function. A hedging strategy is proposed that maximizes utility but escapes problems associated with specifying a particular utility function. This alternative utility function is a function of the expected level of wealth minus the extended mean Gini efficient frontier.