Research On The Hedge Ratio For The Minimum Variance: Evidence From The Copper Futures Market In China

In the economy society, there are always some risks in the market activities.The occurrence of financial derivative markets and different kinds of derivatives provide the conditions and probability for people to manage the risks sicientifically and efficiently. So investors may make use of the derivatives to hedge assets. In our country,the financial derivative market is in the embryo and there is only one derivative-futures. But the financial circles have paid attention to its potential development at home and abroad .This essay chooses futures as the object of research according to the popularity of futures in the international financial market and the importance of futures in the internal financial one.The existence of modern hedging theory dated to 1960,Johnson(1960) proposed Markowitz portfolio theory to describe the hedging. Since the introduction of portfolio theory to research the hedging of futures market, the optimal hedge ratio and the efficiency of hedging has become a hot topic of the futures market research, especially in the theoretical model and the empirical application of the optimal hedge ratio.Whether in the theoretical work or in the empirical work, the modern optimal hedge strategies have deeply been developed, such as ARCH and cointegration by wineers of 2003 Nobel price for economy—Robert F. Engle and Clive Granger. They are representative of the statistical method of time series. One the other hand, with the development of derivative pricing technique, many scholars also use this method to research the hedging of futures market.The time-series methods and hedging derivatives pricing methods have their own advantages and disadvantages this paper. Based on Markowitz portfolio theory, the above mentioned two methods are applied to the Chinese copper futures market to hedge.By comparing the in-sample and out-of-sample hedging effectiveness of these methods,we can find that: In the sample, ECM-BGARCH model considering the cointegration of futures price and spot price has a better than derivatives pricing models in terms of hedging effectiveness .However, comparing with the ECM-BGARCH model , hedge ECM-BGARCH model the static OLS-based methods has a better hedging effectiveness. Besides, ECM-BGARCH model provides the best hedging performance. In short, by studying the the optimal hedge ratio basing on the framework of minimizing the variance and hedging effectiveness, not only we can solve the issue of problem of calculating of hedge ratio, but also we can provide our copper companies with theoretical guidance and practical method of hedging, so this paper has important theoretical and practical significance.