Composite Hedging Strategy Based On Risk Correlation

With the continuous development and interconnection of the entire world economy,the volatility and risk connection between the factors of production,product prices,stock market,exchange rate,interest rate and other important economic and financial variables are becoming increasingly high.This will directly affect the operating profits and management strategies of companies,financial institutions,and various types of investors.Therefore,the demand for risk management has increased accordingly.Financial derivatives have the inborn function of risk management,and the development of the derivatives market has provided more possibilities for meeting the risk management needs.For a risk management entity(such as an enterprise,financial institution or various types of investment managers),it may face a variety of interrelated risks.How to make use of different hedging tools to comprehensively manage their risks has become a topic worthy of attention.First of all,due to the interrelation of risks,the effect of considering different risks independently is different from the management effect of considering different risks as a whole.Second,the market is incomplete.Although the available direct hedging tools are becoming more abundant,in many cases,the conditions for using direct hedging tools are still not available.Coupled with regulatory constraints and restrictions,this affects the use of a single hedging tool to a certain extent.At this point,the composite hedging strategy will naturally come into our sight.The so-called composite hedging: a composite risk management strategy that considers multiple risk sources,especially the correlation between risk sources,and therefore involves the simultaneous use of different futures tools.The simultaneous use of multiple tools will not only bring the advantages of fully considering the relevance,but also bring the effect of risk diversification.To comprehensively describe multiple related risks,we should study a composite hedging strategy that can describe the relevance of all assets.For effective hedging,we must effectively estimate the relevance of various assets,and then we need to study and use a variety of econometric models and methods to estimate the correlation.In addition,the management objectives of different risk management entities may be different,and the management objectives of the same management entity at different stages may change.Therefore,hedging strategies under different hedging objectives are also worthy of in-depth study.The above research questions can be summarized into the following four aspects: First,Risk relevance;Second,The availability of hedging instruments;Third,Estimation methods;Fourth,Diversification of hedging targets and corresponding hedging effectiveness evaluation.Chapter 3 of this article considers both the risk correlation and the estimation method at the same time.It studies the composite hedging under the goal of minimum variance and estimates the composite hedging ratio under multiple econometric models.In addition,it also evaluates the effects of composite hedging and single hedging.Result shows that the composite hedging is better than single hedging.Prior to this,in the context of a single hedging,some documents have confirmed that the hedging effectiveness of the na(?)ve strategy(hedging ratio of 1:1)is not significantly weaker than that of the complex econometric model.The research in this article found that in the context of composite hedging,the hedging effectiveness of simple na(?)ve strategy is obviously not as good as that of complex econometric models.Chapter 4,on the basis of the research of Chapter 3,further expands to the discussion of the availability of hedging tools,that is,Chapter 4 comprehensively expands from the three aspects of risk correlation,estimation methods and hedging tool availability.Since there may not exist directly available hedging tools in the real world and direct hedging is not possible,then indirect cross-hedging is required.This chapter compares dual hedging and single hedging in two different application scenarios: direct hedging and indirect cross hedging.The study pointed out that the advantage of the composite hedging is that it can improve the explanatory ability of hedging strategies,but it also brings disadvantages such as the increased transaction costs.When the underlying asset does not have a direct hedging tool available,and at the same time faces a variety of interrelated risks that need to be considered and cross hedging is adopted,it is more suitable to adopt a composite hedging strategy for management.The previous studies are all carried out under the goal of minimum variance.However,in reality,some investors aim at minimizing Va R or maximizing utility,rather than minimizing the variance.For this reason,Chapter 5 extends the research to the study of hedging strategies considering different hedging objectives,that is,simultaneously covering four aspects of risk correlation,estimation methods,availability of hedging tools and different hedging targets.This chapter proposes the Copula-ADCC-Va R-composite combination hedging strategy and expands the study of the utility maximization combination hedging and compares the dual hedging strategy and the single hedging strategy under different hedging management objectives.This chapter also demonstrates the important phenomenon that combined hedging is better than single hedging from some new perspectives.The results show that the confidence level in the Va R minimum goal and the risk aversion coefficient in the utility maximization goal are intrinsically related.Compared with the hedging strategy with minimum variance,dual hedging under the Va R minimum objective and utility maximization objective will bring many advantages.An important significance of comprehensive research on different hedging objectives is that the management objectives of managers at different stages may be different.Therefore,this research provides a reference strategy for such a realistic demand.Chapter 6 goes a step further and studies the dual hedging strategy of different hedging time scales through wavelet analysis.Therefore,we can analyze the hedging strategies of heterogeneous traders with different risk appetites,return expectations and hedging maturity requirements,so as to make the hedging strategies more customized.The results show that for traders with different hedging horizons,there are also differences in the ability advantages of composite hedging strategies compared to single hedging.The composite hedging shows stronger hedging capability over a single hedge for the one-week scale(short-term horizon).