The Research Of Hedge Strategy Based On Risk Spillover

With the highly popularizing of internet technology and more deepening of financial integration,an unprecedented effective capital allocation and flow around the world comes into being,which breaks the isolated condition among different financial subsystems of the past few decades.And those financial subsystems were placed in a same economic environment.In addition,Investors tend to speculate price fluctuation of a certain market by the corresponding index of another market in the highly merged economic circumstance.Thus risk spillover and risk correlation among different financial subsystems were generated.As we know,stock index market and stock index futures market were two subsystems of our big financial system.Owing to their intimate internal relationship and similar external shocks they were exposed to,we can make a bold speculation that risk spillover and risk correlation may exit between them.The core of this study is to check whether there exit any risk spillover and risk correlation between the stock index market and stock index futures market,and then takes the advantage of stochastic volatility model to calculate optimal hedging ratio.As a result,new method will be provided for investors.In order to illustrate the risk spillover and risk correlation between the stock index market and stock index futures market,the author of this paper intends to introduce two stochastic volatility models,one involves risk spillover called GC-MSV and the other is related to risk correlation called GCC-MSV.And then MCMC estimation technique will be used to derive relevant parameters,which will be used to calculate optimal hedge ratio.Later,the author will put dynamical correlation coefficient into the two models,thus get two new dynamical models,i.e.,GD-MSV and GDC-MSV to see whether the dynamic association contributes to hedging effectiveness.Based on the principle of minimal portfolio risk,hedging effectiveness comparison will proceed among the four models and constant correlation model.Empirical analysis shows that,there do exist risk spillover and risk correlation between the stock index market and stock index futures market.And an extra finding is that the models involving risk spillover contribute to capture the market key period for the fluctuation in its hedging ratio chart,and it is consistent with the time of policies issued.In addition,in the check of hedging effectiveness,several other interesting findings were also presented.The models involving risk spillover have a higher hedging effectiveness than constant correlation one,but the risk correlation models' hedging effectiveness is not higher than constant correlation one.So a conclusion is thus reached that the risk spillover analysis is helpful to improve hedging effectiveness,but risk correlation analysis wouldn't help very much.