The Study On Hedge Ratio Of CSI500 Stock Index Futures Based On Timing Strategy

By 2015 the stock market had affected millions of investors. Chinese investors prefer small and medium-sized stocks. High-risk investment can bring higher return, meanwhile, the volatility of stocks in SME board and growth enterprise market is very high and the market risk is high. The stock index future based on CSI 500 can act as an effective risk hedging tool. This paper aimed at figuring out the optimal hedge ratio based on the study of CSI 500 stock index future.Firstly, this paper reviewed the relevant research and basic concepts about stock index futures hedging instruments. We found there exist various practical application limits in both the traditional minimum risk hedging model and utility maximization model. After summarizing the relevant concepts about stock index future heding, this paper introduced the dynamic timing GARCH (1,1) model to improve the optimal hedge ratio. GARCH (1,1) model based on timing strategy of hedging is essentially a periodic hedging strategy, investors could start hedging when the CSI 500 index falls down, and stop hedging when this index rises up. It not only decreases the difficulty of market timing in hedging, but also can improve the efficiency of hedging.We collected the CSI 500 stock index futures and CSI 500 ETF data including daily returns and 15 min’ returns since last year through Royal Flush Ifind financial database. Using R and Eviews, this paper respectively analyzed the OLS model, GARCH (1,1) model and GARCH (1,1) model based on timing strategy. The results showed that the GARCH (1,1) model based on timing strategy we built, obtained a better optimal hedge ratio in both series of the 15 min’ returns and daily returns.The results of this paper can provide a new way to study the hedging model for investors. Meanwhile, the empirical results of this paper about different CSI 500 heding models are great references for institutional investors and high-frequency traders.