Hedging Ratios And Efficiency Research On The CSI300 Futures

Stock index futures are useful financial instruments which contributed significantly to the development of financial markets.Hedging risk is one of the main function of index futures due to the long-term equilibrium relationship between the spot and futures.The release of the first CSI 300 index futures is a notable benchmark and it is of great significance to explore the hedging performance in Chinese futures market for both investors and hedgers to manage risk.This dissertation investigates the hedging effectiveness of the CSI 300 index futures in Chinese financial market over the period June 2010 – June 2016 which is split into the in-sample and out-of-sample.Three econometric models are employed to estimate the optimal hedge ratios: the OLS model,the Error Correction Model(ECM)and the ECM-GARCH model.Due to the fact of the Chinese A-share plunge in the middle of 2015,the high-volatility period has been picked out from the out-of-sample and the hedging effectiveness were examined separately.The general conclusions reached from the empirical results were that:(I)The CSI 300 index futures is a useful instrument of hedging which can reduce over 90% of variance for both in-sample and out-of-sample series compared with the unhedged position.(II)Compared with the traditional 1 to 1 hedging strategies,all the models provide superior hedging performance.Also,all the hedge ratios estimated by the models are less than 1.Thus,econometric models are suggested to be employed to estimate the optimal hedge ratios,which can not only enhance the hedging performance,but also reducing the transaction cost.(III)Different model should be used under different situation.For both the in-sample and out-of-sample periods,the OLS model has the superior hedging effectiveness by reducing 90.01% and 90.48% of variance respectively.In terms of the selected high volatility period,the ECM-GARCH model is more favorable with the abnormal fluctuate.Compared with developed financial markets,there are still several problems in Chinese financial market,such as the unreasonable participators,insufficient futures contracts and the incomplete stabilizer in the market.Thus,several suggestions have been provided to the hedgers,transaction agencies and the regulators in terms of the problem above.