The Empirical Study Of China's Treasury Futures Hedging Ratio

In recent years, China has been experiencing the continuously deepening of reform in financial market, especially with the acceleration of the RMB internationalization and the interest rate liberalization. However, the interest rate liberalization meaning the right to decide the interest rate would be left to the market which will cause frequent fluctuations in the market. At the same time, with the unstable international financial situation, the RMB internationalization will also have great impact on the interest rate formation system causing dramatic fluctuations of interest rates. And bond investors would be in greater and greater needs to circumvent interest rate risk given such backdrops. The mature method of international interest rate risk management would be hedging in treasury futures market. In September 6 2013, China restarted the treasury futures market that had been closed 18 years ago, which entitled huge practical significance on the research of the utilization of the treasury futures hedging.Comparisons among futures markets domestic and abroad of the applications of the hedging ratio model has been made in this paper. Further research has been done including the treasury futures contract, the current state of the market, the hedging theory and the mainstream hedging ratio estimation model in China. Different varieties of deliverable bonds, non-deliverable bonds, financial bonds and credit debt was chose as quilt cover insurance bonds, and the treasury futures TF1412 was selected as the hedging tool. Preliminary analysis included the correlation calculation, the ADF test and the EG test. The second step is to estimate the corresponding calculating hedge ratio with the traditional basis-point value method, the classical OLS model and the ECM model. Then modification was made using the beta regression method before the final comparisons of the hedging performance.The empirical analysis shows that, it would be helpful to lower the interest rate risk hedging with the five-year treasury futures. However, given the relatively short time on the list, the lack of liquidity, the unstable basis point fluctuation and the incomplete marketization of interest rate, the hedging effect is not obvious. Among different bonds above, the deliverable bonds gave the best performance, with the non deliverable bonds being the second best and the financial bonds and credit bonds being the least best given the poor correlation between credit bonds and treasury futures. While the performances between the traditional hedging method and the minimum deviation method are similar, the traditional hedging method is of better application with its easy operation. And the minimum deviation method is influenced by the historical data which makes it less easy to obtain the accurate and effective hedging ratio.