The Empirical Study On Price Discovery And Hedging Functions Of Treasury Futures

Treasury futures experienced a long history, and is operational mature. Now it is widely used to manage interest rate risk. Since September 6,2013, the re-launch of Treasury futures represent a new level of China’s futures market. Under the background of economic and financial globalization, the launching of Treasury futures will be beneficial for investors to get rid of interest rate risk. In addition, the successful launch of bond futures will be helpful to improve the bond market system; It will stimulate the issuing of treasury bond, improve the liquidity and pricing efficiency of the bond market, thus it would be helpful for the establishment of a sound base rate system; Furthermore, it would help promote the development of financial innovation.Treasury futures have many functions, such as price discovery, avoid interest rate risk, promote bond issuing, improve the liquidity of the spot market and improve the efficiency of asset allocation. Among these, hedging and price discovery is the most fundamental and core function of bond futures, it determines the effectiveness of the bond futures market directly, and would affect other functions. Therefore, the study of price discovery and hedging functions of bond futures has great theoretical and practical significance.As to the development of bond futures, we applied the existing methodology from home and abroad to do the empirical research on bond futures price discovery and hedging functions, using the data of existing four futures contract which is listed since September 6th,2013.Firstly, we did the stability studies on Treasury futures and spot prices, mainly using ADF unit root test and Johansen co-integration test; Additionally, in order to study the relationship between the price guiding of futures and securities, we used Granger causality test and error correction model (ECM). We come to a conclusion that the futures price changes is the Granger cause of the changes in the spot price, while the spot price is not Granger cause changes of futures prices, futures prices will guide the changing of the spot price.Then, we studied the hedging function of futures market. We mainly used minimum variance estimation method and basis price method. Combined with the characteristics of time series data, based on the theory of minimum variance we applied the traditional OLS regression method, B-VAR model analysis, ECM error correction model and EC-GARCH method to estimate the optimal hedge ratio. Then we use the hedging performance measure, proposed by Kroner and Sultan (1993), to compare the effectiveness of each method. We concluded that the futures market has a good hedging function.Hedging portfolio effectively reduce the volatility, it provide a good interest rate risk aversion tool for investors. According to the hedging effectiveness ratio, we find that the models exhibit different effectiveness when using different method, no optimal method exists.