A note on estimating the minimum extended Gini hedge ratio

The extended Gini coefficient, Gamma, is a measure of dispersion with stron g theoretical merit for use in futures hedging. Yitzhaki (1982, 1983) provi des conditions under which a two-parameter framework using the mean and Gam ma of portfolio returns yields an efficient set consistent with second-orde r stochastic dominance. Unlike mean-variance theory, the mean-Gamma framewo rk requires no particular return distribution or utility function to yield this conclusion. However, Gamma must be computed iteratively making it less convenient to use than variance. Shalit (1995) offers a solution to the co mputation problem by suggesting an instrumental variables (IV) slope estima tor, beta(IV), as the basis for the minimum extended Gini hedge ratio where the instruments are based on the empirical distribution function (edf) of futures prices. However, the validity of employing the IV slope coefficient as the basis for the minimum extended Gini hedge ratio requires the questi onable assumption that the rankings of futures prices to be the same as tho se for the profits of the hedged portfolio. (C) 1999 John Wiley & Sons, Inc .