The Determination Of China Stock Index Futures Hedging Ratio

The significant feature of china stock index is that it is more volatile and more risk, which can not be avoided by diversified investment. But how to choose hedging ratio impacts its effectiveness. Thus the determination of optimal ratio of futures hedging has become the core issue of theoretical research. China has failed to launch stock index futures. The direct use of portfolio data and stock index futures data to determine the method in mature markets does not apply in China. So how to determine the optimal hedge ratio is of great practical significance in the conditions that stock index futures has not been yet introduced.This paper begins with a review of the Future Optimal Hedge Ratio theory, classifying the theory into five categories—the minimum variance model,the mean-variance model,the expected utility maximization model,the mean extended-Gini coefficient model as well as the semi variance model- and elaborate on parameter estimations of each model and further research on the relationships between models. Then I adapt the minimum variance model to the domestic environment and come up with a Future Optimal Hedge Ratio model. Utilizing CSI 300 Index I makes an empirical study on the effectiveness of the future hedge on four investment portfolios. The conclusions are that: first, the model solves the data shortage problem effectively. And there exists a systematic bias in the future-spot data substitution and coefficient. So revisions are needed. I also find the original hedge ratio computed from spot data for performance evaluation is right. Second, Empirical studies have shown that the higher the coefficient between the portfolio and CSI 300 Index, the better the future hedge works, which is consistent with the theoretical model.