Study On Dynamic Hedging Strategy Based On Multivariate Stochastic Volatility Model

Transfer of risk is one of the main functions of the futures markets. Risks are transferred to those willing to bear them, as hedgers reduce their risk by paying a premium to speculators. The very core issue of hedging is determination of optimal hedge ratio. Through choosing hedging model to estimate the optimal hedge ratio can improve hedging effectiveness and effectively averse the risk of cash market.There are five chapters in this paper. The first chapter is mainly about the significant of the research, present research review, frame of the paper and main content. The second chapter is the present theory and model of futures hedging. The second chapter has carried on the review of the present hedging theory and three commonly used models. The third chapter study on the dynamic correlation multivariate stochastic volatility (DC-MSV) dynamic hedging theory model. The fourth chapter takes an empirical study based upon DC-MSV dynamic hedging model, and conducts the contrast research with three commonly used models.According to the stochastic fluctuant characteristics of spot and futures price, this paper puts forward a new dynamic correlation and sets up a dynamic hedging model basing on the dynamic correlation multivariate stochastic volatility model. The major innovation of this paper is that it estimates the dynamic hedge ratio by DC-MSV model. The characteristics lies on three aspects: Firstly, it reveals the time-varying characteristics of optimal hedge ratio by constructing the function relationship between hedge ratio and time-varying standard deviation of spot and futures returns. Secondly, by establishing DC-MSV model with time-varying correlation coefficient, it reveals the valid information of the factors which drive the price fluctuation of assets, and fully estimates the cross correlativity of price fluctuation of assets. Finally, the empirical study shows that the efficiency of DC-MSV model is superior to the current popular hedging models. This paper takes an empirical study based upon dynamic hedging of minimum variance hedge ratio of spot and futures of Shanghai copper, and the results show that DC-MSV model performs better than naive, OLS and GARCH hedging strategies on both within-sample and out-sample hedging effectiveness.