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Futures optimal hedging strategy in the empirical study of Chinese metal futures market

Author: WangZuo
Tutor: HuRiDong
School: Huaqiao University
Course: Finance
Keywords: future market hedging minimize risk BEKK-MGARCH
CLC: F224
Type: Master's thesis
Year: 2007
Downloads: 484
Quote: 3
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Abstract


The commodity future market is the most developed derivative market in china up to now. But the principal parts’consciousnesses of risk aren’t very strong or feel hard to find the proper tool to control the risk in the market. Some of them cannot gain good effect without high cost. In this paper, we consider various methods in minimum-variance hedge strategy in Chinese futures markets , and find out some valuable demonstrating conclusion.We study the developing course of future hedging strategy, and compute the Optimal Hedge Ratios (OHRs) between spot and futures for some commodity prices by using different methods. The models we use are: (1) ordinary least square (OLS) estimator; (2) Bivariate Vector Autoregressive Model; (3) Vector Error Correction Model; (4) Multivariate GARCH Model. Especially, we use predigested BEKK- MGARCH Model to estimate OHRs in the demonstration research and compare with the others methods.According to the situation in Chinese future market, we use metal future contracts to estimate OHRs with the strategies mentioned above. Different methods are compared with each other in their performance of variance-reduction. The results show that: (1) The principal parts use future hedging to manage the market risk is efficient even Chinese future market is still not very mature up till now. (2) For the within-sample hedge, the dynamic strategy has no priority; but for the out-sample hedge, the dynamic strategy performs better than other static strategies ; But considering the complexity and high cost it brings, OLS is better for the investors.The future study could be carried in more different future markets in china, other hedging modes, and providing the operating capability of the dynamic strategies.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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