A Research On Hedging And Speculation In The Commodity Futures Markets Based On Markov Regime-switching Model And DCC-GARCH

In October 1992,relying on spot transactions,Zhengzhou grain wholesale market established China's first commodity futures trading market.Since then,China's commodity futures have experienced 26 years of development to a larger scale market with a substantial number of participants.The commodity futures market provides a channel for risk avoidance for commercial trader as well as an investment platform for speculative traders.Speculative investors and hedge investors,as two kinds of participants in the market,have a huge impact on the futures market prices.Therefore,how to figure the size and characteristics of speculation and hedging activities in the futures market are important issues to the market's legislation.It is of great significance and necessity to study the characteristics of speculation and hedging in the futures market and their dynamic characteristics.It is difficult to define the boundary between hedging and speculation.Therefore,it is difficult to quantitatively research and characterize speculation and hedging activities in the market.The existing literature on the hedging and speculation focuses mainly on the qualitative research on the effects of the two on the whole,and studies on the dynamic relationship between the two are few.According to the different purposes and influencing factors of speculative behavior and hedging behavior(when investors participate in the futures market trading based on the purpose of hedging,they will try to reduce portfolio variance.When the portfolio variance is tend to be large,the futures contract holders will need more futures positions to reduce the risk,on the contrary,short futures contracts will need to sell more futures contracts to reduce risk;when investors participate in futures trading based on speculative purposes,the demand for futures contracts will depend on two aspects,one is the expected revenue and the other is the consideration of maximizing the variance rate of return.The demand model of speculation and hedging is constructed.Since the net position in futures market is zero,the sum of speculative and hedged demand is also zero to construct a balanced model.After sorting out the literatures related to China's futures market,this paper finds that fluctuations in futures yields are characterized by agglomeration effects and change with time.A simple linear model cannot effectively characterize the volatility characteristics of returns.To overcome the limitations of the linear model,dynamic condition-dependent GARCH model is developed to characterize the volatility of yields.The research on the correlation between the futures market and the spot market has a good performance.In this paper,we select five representative futures markets in China's futures market-sugar,soybean meal,copper,aluminum,fuel oil and rubber.We construct a dynamic model of the hedging and speculation in commodity futures market based on DCC-GARCH.Further,In order to capture the consequences of the growing turbulence of these markets,a two-state Markov regime-switching model for futures returns is developed.This model link speculation and hedging behavior with” market state” to study the characteristics and changes of speculation and hedging behavior under different market conditions.After all,this paper reach to some useful conclusions:(a)Consumers of commodities in the aluminum and copper futures markets are the main participants in hedging activities.The suppliers of commodities in the sugar,soybean meal and rubber markets are the main hedging participants.Speculators in copper,aluminum,sugar seem to be a risk appetite,while speculators in other species showed risk aversion attributes.(b)In the aluminum and copper markets,hedging traders havemore influence on the futures return than the speculative participants,while in the other three markets,the impact of speculative participants is greater than that of the hedging participants.In the aluminum market and copper market,hedging traders have more influence on futures yield than speculative hedging participants.In the other three markets,the impact of speculative hedging participants is greater than that of hedging participants.(c)After developing the Markov regime-switching model,the study found that speculation and hedging will change(in addition to aluminum and natural rubber)with the change of the risk.When the market is in a state of low volatility,the participants of the hedging behavior are mainly consumers.When market volatility becomes larger,the producers of commodities become the main hedging participants.Speculative behavior from the point of view,speculators risk appetite is changing over time.when the market is in a state of larger volatility,speculators appear to have improved investor risk appetite.In other words,as the market conditions change,the risk flows from hedging to speculators.Further,based on the above conclusions,this article puts forward some suggestions for futures trading supervision.This paper overcomes the” exchange hole” in the process of defining speculative and hedging in the futures market.It creatively links the scale of speculative and hedging activities with market risk to figure the speculative and hedging behaviors.The disadvantages of the new method are as follow.First of all,a complex statistical model may make statistical or hypothetical errors affect the results of the study;secondly,this paper chooses to measure the impact of speculation and hedging on futures yields.The indicators are relatively single,and the issue of how the two types of investment behavior affect the market remains to be further studied and expanded.