Estimation Of Futures Basis Risk And Its Factors

Dealing with future basis between future market and spot market is an important method to hedge price risk. However, more and more domestic companies make a loss though hedging because of less in knowledge of hedge risk and the limitation in hedge risk valuation and management. Therefore, it is meaningful to study the characteristic of future basis and its factors.Based on the background, the thesis chooses future basis between futures market and spot market in London Metal Exchange (LME) to be the analysis object, uses several popular models such as ARMA, GARCH, EGARCH, TGARCH etc. to simulate the characteristic of basis movement and applies VaR model to estimate basis risk. Furthermore, in order to lucubrate the characteristic of basis movement, the thesis summarizes three influence factors including stock, interest rate and spot price based on the theory of futures holding cost, the theory of market supply and demand and the theory of behavior in financial market and analyze the process of the affection from basis trend and volatility.It concludes that the volatility of basis has the characteristic of gathering and unsymmetry. What's more, after analyzing each factor specifically, it indicates that stock induces basis moving to the opposite direction, and spot price and interest rate induce basis moving to the same direction from both trend and volatility. Furthermore, the basis behaves more and more risk from 2004, which takes much difficulty for companies to hedge.The major innovation of the thesis lies in applying popular models into the analysis of future basis. Furthermore, according to the theory, the author concludes three influence factors, and gives some reasonable explanation about the process of affect. It is expected that the research is able to filling in the blanks of hedge theory, and give some suggestion to domestic companies in hedging decision-making.