Futures Hedge Ratio And Preservation Period

In the hedging practice, almost all market participants have different hedge horizon.The dynamic relationship between futures and spot market may change significantlyaccording to the different hedge horizon. So in different hedging period, the correspondingoptimal hedge ratio must be different. Due to the evident flaws when using traditionaleconometric methods to solve the problems, this paper tries to use the wavelet analysis toestimate the optimal hedging rates in different time scales. Specifically, the paper, usingwavelet analysis, estimates the optimum hedge ratio and the corresponding hedgingeffectiveness of the Hushen300stock index future and Cu-future contract respectivelyover various time horizons. Other econometric models are also used as benchmark for thepurpose of comparison, including the OLS、ECM、GARCH、ECM-GARCH model. Theresult suggests that, based on the wavelet analysis, the hedge ratio increases as the wavelettime scale increase. Also the effectiveness of the hedge increases with the hedging horizons.This may imply that, due to the arbitrage, the correlation between the future and spotmarkets gradually increases in the long run while many uncertain factors negatively affectthe hedge in the short run, leading to the weak hedging effectiveness. Furthermore, it isrevealed that the wavelet technique does boost hedging effectiveness compared with othermodels, which may have something to do with the advantages of the wavelet analysis.