The Simulation Empirical Study On The Hedge Effect Of Stock Index Futures In China

From July 2007, the eruption of U.S. subprime crisis spread out to the surrounding countries and areas rapidly, and eventually became the global financial crisis. The global financial crisis increases the risk of the financial market. Since they can hedge the risk resulting from the spot price fluctuations and fix the future cost and profit, the derivatives become one of the best choices to avoid the risk of the financial market. And stock index futures are the most used derivative among the hedging financial instruments.As a common financial instrument, the stock index futures were born in U.S. to hedge risks and to earn arbitrage profits. Stock index futures are a kind of standard financial futures with the stock price index as their underlying assets. They are characterized by the high leverage, the low transaction cost, the abstract underlying assets and the convenient short-selling mechanism. Additionally, stock index futures have many important functions in the financial market, such as price discovery, risk hedge, capital allocation and increasing the stability and liquidity of the stock market.Many countries value the significant roles of stock index futures. It takes China about four years to promote the Shanghai and Shenzhen 300 Stocks Index Futures. Finally, it came out at April 16,2010. The Shanghai and Shenzhen 300 Stocks Index Futures complements China's short-selling mechanism, and provides investors a convenient channel to hedge the risk of the stock market. However, stock index futures are a sword with tow blades. Although we can use them to hedge some risks, stock index futures will bring new risks their selves. Since many investors in China know little about the hedge mechanism of stock index futures, this paper aims to help investors understand this kind of hedge mechanism.This paper starts with the definition of stock index futures, and analyzes the economic functions of stock index futures to provide the essential theory for the simulation empirical study followed. In the first part, I introduce the concepts, the development, and the four important functions of stock index futures, especially their development in China. In the next part, the paper reviews the hedge theory, including the economic principles of hedge, the types of hedge, the basis risk theory, and the development of the theory. I also analyze the decision method for the hedge transactions. In the third part, I try to construct the empirical models. I first calculate the hedge ratio, and compare the hedge strategies. I use the smallest variance hedge ratio method, the traditional OLS regression and the dual GARCH model to determine the best hedge ratio. Then I assess the hedge effect and build the hedge model. Finally, I design the practical hedge process. In the fourth part, due to the short history of China's stock index futures, I use the Shanghai and Shenzhen 300 theoretical futures to replace the actual index. I select the Shanghai and Shenzhen 300 data from October 9th,2009 to December 31,2009. For the stock portfolios, I use the fund's top 20 investing stocks in the fourth quarter of 2009. The paper uses the two common hedge models to take the empirical analyses, and compare the hedge effect. It helps investors understand the hedge process, and improve the risk control in the hedge process.Based on the comparison of the model assumptions, the model flaws, the statistics and the hedge effect, the hedge portfolio model is better than the simple hedge and the selective hedge models. From the simulation empirical study for the hedge effect of stock index futures, the paper finds that investors can use the stock index futures to reduce the risks and to enhance the investment profits. Additionally, it proves that the dual GARCH model is superior to the traditional OLS model when we estimate the hedge ratio. However, the difference between both estimated hedge ratios is small, because of the simple investment profolio and the small sample in the study. Therefore, due to the operation difficulty, I suggest small investors to adopt the OLS model, while the sophisticated investors to adopt the GARCH model. Finally, please note the risk of stock index futures.