Empirical Performance Of Alternative Optimal Hedge Ratio Models-Based On The Chinese Market

In the past forty years, as the financial markets and theoretical research continue to develop, traditional OLS optimal hedge ratio model has become more and more incompatible with the actual situation of financial markets, and its hedging performance is declining. Therefore, researchers try hard to improve the traditional OLS model and put forward many new models for the study of optimal hedge ratio.The research process of optimal hedge ratio models is down to two main lines: (1) Continue to study and suggest improvements in the framework of traditional OLS model, such as B-VAR model, OLS-CI model, ECM model and so on, this type of models can directly get the optimal hedge ratio through estimating model parameters. (2) Complex multi-GARCH models which develop from univariate GARCH model, such as VECH model, BEKK model, CCC model, DCC model, Copula-GARCH model and so on, this type of models can estimate the variance-covariance matrix or the conditional correlation coefficients, and then derive the optimal hedge ratio through calculating.Based on the spot and futures data of copper and aluminum from Shanghai Futures Exchange, this paper devotes to estimating the optimal hedge ratio of Shanghai copper and aluminum, and investigating the hedging performance of following models: ECM model, which improves in the framework of traditional model; DCC model and Copula-GARCH model, which have comparative advantages in multi-GARCH models.The results are: (1) The Copula-GARCH model has the best hedging performance, followed by the DCC model, and the ECM model ranks the last. (2) Up on the species, the copper hedging performance is obviously better than the aluminum.