The Empirical Research Of Optimal Hedging Ratio In China’s Steel Market

Futures market can be seen as the main thrust of development in the spot market from the demand for hedging. In1993, in the situation of no international reference case, the first steel futures successfully listed in China. In2009, the steel futures relisted, which showed the spot market having strong demand for steel hedging. When facing their company’s risk exposure, how many positions should futures contracts buy? This requires that they must estimate the hedge ratio.All along, the hedging problems are the mainly financial issues. So the optimal hedge ratio is the core problem. In this paper, drawing on relevant theoretical and empirical international hedge certain conclusion, we do researches on China’s steel futures. We use the OLS, VAR, VECM, VECM-BEKK-MVGARCH, VECM-DCC-MVGARCH, VECM-CCC-MVGARCH models to estimate the optimal hedge ratio in Chinese steel futures market, and then use the data to measure the performance of hedge, through which a more comprehensive comparative analysis will find a relatively good strategy for the hedge. To the steel enterprises we would like to provide some suggestions.In this paper, the study samples contain Shanghai Futures Exchange rebar futures prices and spot prices for rebar HRB40020MM from March28,2009to June30,2011. Totally, there are551pairs of sample data. Futures data is from financial software and the spot data is from’http://www.mysteel.com/’.The results show that after carrying out hedging, no matter what kind of the model is, it can effectively reduce the risk of price changes. Overall, the hedge ratio and hedging efficiency of the static model OLS, VAR, VECM do not show significant differences. Therefore, if we want to use the static hedging strategy, the OLS model is an economical and practical choice. The dynamic hedging model is better than the static hedging model. So as to carry out hedging, it is scientific to choose the time-varying hedging strategy for steel companies. This study shows that the VECM-CCC-MVGARCH hedging model has the highest efficiency, so the steel enterprises can use this model to calculate the optimal hedge ratio if carrying out the hedging strategies.