Research On The Hedge Ratio And The Hedge Results Of CSI300Stock Index Futures With Basis Effect

Stock index futures is an important financial derivative product, with riskavoidance as its main function. In most developed countries, the development ofstock index futures has been quite mature. As an emerging capital market, financialrisk in China has been increasing, which caused the loss of investors, and postponedthe development of Chinese financial market. In order to alleviate this situation, CSI300stock index futures was officially listed in the China Financial FuturesExchange on April16,2010. So, short position is now allowed, and the stockinvestors have more space and methods for hedging. So far, the CSI300stock indexfutures can only be traded by institutional investors, and to effectively use thisproduct is an urgent and necessary issue.Through a thorough literature review, this paper summarizes the developmentof hedging theory and models. By, considering the characteristics of GARCH model,positive and negative basis and the squared of ones are added in the multivariateGARCH model as the exogenous variables, to calculate the optimal hedge ratio ofCSI300index futures with basis effect. The sample data selected for forecasting theoptimal hedging ratio and testing the hedging results are daily settlement price ofCSI300stock index futures and closing price of CSI300stock index655data fromApril16,2010to December21,2012. In this paper, different days have beenselected for comparing the hedge results between optimal hedge ratio with andwithout basis effect.The results shows that, the effect of basis for the CSI300index futures’ andspots’ log price is not significant, the effect of basis for the CSI300index futures’and spots’ log profit is significant; the hedge result of CSI300stock index futureswith basis effect is better than that without basis effect, but this advantage is notobvious. With the increase of hedging time, the results converge. Some practicalimplications can be got from the above conclusions: the short-term hedger shouldconsider the basis effect to get a better outcome; for the longer-time hedgers canobtain better outcome, even without considering the basis effect.