Studies On Hedging Strategies And Risk Premiums Of Commodity Futures In China

According to the US Futures Industry Association(FIA), China has become a world leader when it comes to its commodity futures market, with the total turnover of 1.868 billion in commodity futures contracts, accounting for 46.13% of global commodity futures trading volume, and a year-on-year increase of 38.9% in commodity futures exchanges in April 2014. During times like this,the valuation and hedging of commodity contingent claims has received a great amount of attention by both academics and practitioners, and has become an important area of financial economics.Therefore,we studies the methodology and theoretical model of econometrics to explain the interest issues concerning futures market including the way to determine and implement the optimal hedging strategy, determinants of basis, measurement of futures risk premium and mean reversion in short-term prices as well as uncertainty in the equilibrium level to the long-term prices of commodity futures. The organization and conclusion of the article is provided as follows.Firstly,considering the existence of heteroscedasticity in both spot and futures prices of commodity as well as the cointegration relationship between them, we establish a commodity futures hedging model incorporating the convenience yield as the error modifying factor(ECT-GARCH model).We find that it performs better than other models when applied to hedging model based on convenience yield of commodity futures.Secondly, based on the theoretical conclusion, we draw that inventory as an explanation for the futures price basis, and resorting to a cubic spline regression,we examined the relationship between the basis of Chinese Copper futures, Aluminum futures and Oil futures and their corresponding inventory, respectively. We show that there exist a decreasing non-linear relationship for both 3 groups of futures above。Thirdly, considering the veracity of the theory of commodity futures risk premium, we examine the existence of risk premium, systematic and basis risk premium using prices for 18 kinds of futures contracts that are divided into 3 groups: metal futures, agricultural futures, fuel and chemical products futures. For these markets, we find that there exist different types of risk premium among commodity futures, respectively.Last but not least, we applying Kalman filter estimation procedure for further analysis of the determinants(Mean reversion in short-term prices and uncertainty in the equilibrium level to the long-term prices) of commodity risk premium based on the theory of commodity futures risk premium that we concluded. It can be concluded that the long-term equilibrium and the fluctuation in short-term of commodity prices is in consistent with the predictions of the theory of commodity risk premium.From the results shown above, we can observe that this article explained both price trait and hedging strategies of China commodity futures from both theoretical and empirical perspective, respectively. And our findings coming up with deep implications for both hedgers and investors.