Research On The Optimal Hedge Ratio For China’s Iron Ore Market Using Copula-GARCH

From the 21^st century,China’s steel industury experienced fast growth with China’s economy boost.In recent years,the policy of cutting overcapacity and supply-side reform in China and global economy transformation cause the price of iron ore volatiles frequently,which bring market risks to participants in iron ore markets like steel industrial investors.With the hedging via iron ore futures,it will help market participants reduce risk from volatility of iron ore markets.In this article,we select spot return series and futures return series from both China and Singapore markets,with the range from 2013.12 to 2018.3.Then we establish Copula-GARCH model to estimate the optimal hedging ratio for iron ore market.Firstly,we establish GARCH model to fit the volatility of spot and futures return series separately and specify the exact marginal distribution with the estimation.Secondly,based on the first step,we select the appropriate copula function to fit the Copula-GARCH model,which get the dependence between the spot and the futures.Lastly,we get the optimal hedge ratio from the model above.In addition,we will evaluate the efficiency of the model we choose.According the study,tCopula-GARCH model performs better than any other model we choose,which means it has the smallest hedging ratio with the highest hedging efficiency.For its practical significance,investors can use the model to avoid the price risk in iron ore market with relatively low cost.