The Quarterly Review of Economics and Finance 43 (2003) 433–465 Futures hedge ratios: a review Sheng-Syan Chen a,∗ , Cheng-few Lee b,c , Keshab Shrestha d,e a Department of Finance, College of Management, Yuan Ze University, 135 Yuan-Tung Road, Chung-Li, Taoyuan, Taiwan, ROC b Department of Finance, Rutgers University, New Brunswick, NJ, USA c Graduate Institute of Finance, National Chiao Tung University, Taiwan, ROC d Nanyang Business School, Nanyang Technological University, Singapore e Faculty of Administration, University of Regina, Regina, Sask., Canada Received 18 May 2001; received in revised form 22 February 2002; accepted 7 June 2002 Abstract This paper presents a review of different theoretical approaches to the optimal futures hedge ratios. These approaches are based on minimum variance, mean-variance, expected utility, mean extended-Gini coefficient, as well as semivariance. Various ways of estimating these hedge ratios are also discussed, ranging from simple ordinary least squares to complicated heteroscedastic cointegration methods. Under martingale and joint-normality conditions, different hedge ratios are the same as the minimum variance hedge ratio. Otherwise, the optimal hedge ratios based on the different approaches are different and there is no single optimal hedge ratio that is distinctly superior to the remaining ones. © 2002 Board of Trustees of the University of Illinois. All rights reserved. JEL classification: C130 Keywords: Hedge ratio; Semivariance; Cointegration; Minimum variance; Gini coefficient 1. Introduction One of the best uses of derivative securities such as futures contracts is in hedging. In the past, both academicians and practitioners have shown great interest in the issue of hedging with futures. This is quite evident from the large number of articles written in this area. ∗ Corresponding author. Tel.: +886-3-4638800x667; fax: +886-3-4354624. E-mail address: fnschen@saturn.yzu.edu.tw (S.-S. Chen). 1062-9769/02/$ – see front matter © 2002 Board of Trustees of the University of Illinois. All rights reserved. PII:S1062-9769(02)00191-6