Research On The Nonlinear Characteristics And Hedging Strategy Of Chinese Steel Futures Market

The current domestic futures market hedging researches in our country mainly focus on commodity futures and stock index futures due to the historical reasons for market development.The major varieties of commodity futures include agricultural products and non-ferrous metal products,in which copper is the main research object.Since the late launch of ferrous metal futures in China,the related research is less.Under the background of the supply side structure reform in China,influenced by the change of production capacity and market demand period,the market prices change dramatically from iron ore to steel.To avoid the systemic risk,the increasing demands for hedging call for more and more attention on steel futures hedging researches.In this paper,we study the non-linear characteristics of China’s steel futures market under the framework of complexity theory.Using the fractal spectrum and R/S method,the fractal characteristics of China’s deformed steel and wire markets are studied in this paper which leads to the finding of the existence of scale features.From the perspective of market non-linear characteristics,variety of methods are employed to explore the hedging methods,the optimal hedge ratio and hedging efficiency in steel markets,providing reference for the hedging strategy and the risk measurement for steel futures price volatility.The main research work includes:(1)The time series analysis,multi-fractal spectrum and rescaled range analysis method(R/S analysis)were used to empirically study the returns series of deformed steel and wire markets in China.It is proved that the price change characteristics of deformed steel and wire market are very different from those of the market under the effective market theory.The distribution of returns data is typical of "high peak and thick tail",the market price volatility is clustering,and the normal distribution assumption is insufficient to capture this phenomenon,which will underestimate the actual risk level of the steel spot market when in high confidence level.It is not sufficient to describe it simply by using a single price scale index.The multi-fractal analysis method can better describe the change rule of steel price,and the market display non-linear properties and the fractal characteristics of long-range memory.(2)In the hedging operation,basis and the risk value(VaR)are all the methods measuring risk.The changing condition of basis is the foundation judging the realization of hedge,although the VaR can determine the maximum possible loss in a specific period of the future,it does not take into account the volatility of the return on assets.Hence,the basis risk indicator varying with time is combined with risk value indicator considering extreme loss.Based on the concept of value at risk of returns,the VaR method is used to measure the risk value of the basis,and the buying hedging and selling hedging strategy are combined to study the basis risk of hedging of steel traders.Because VaR method is based on the theory of probability statistics of the system,which can clearly express the degree of market risk,study the extreme value distribution from the perspective of risk value,and provide new quantitative tools for controlling the extreme risk of the market and carrying out effective risk management of steel futures market.(3)Using the market data,the hedge strategy is studied from the perspective of risk premium.According to the length of the investment period,the form of the risk premium is selected,and the calculation method of the risk premium and the relative risk premium is defined.From the point of view of the possible gains of the stock holder,the calculation method of the spot convenience returns is established.Based on the convenient returns,the calculation method of the relative risk premium is adjusted,and the convenience returns and risk premium of the deformed steel futures,wire futures and hot rolled coil futures market listed on the Shanghai Futures Exchange are analyzed empirically.It has been pointed out the inherent relationship between the degree of risk aversion of the arbitrage and the risk premium obtained by speculators.It is found that hot-rolled coil market futures investors display the highest degree of risk aversion,the deformed steel market futures risk aversion follows,and wire futures market investors show risk appetite characteristics.The steel futures market exists selective hedging prevalently,and the excessive speculation is not obvious.There is a positive correlation between the premium of steel futures and the volatility risk and expiry date of steel spot price.(4)From the point of view of the average risk of extreme tail loss,the conditional value at risk(CVaR)is used to measure the expected value of tail loss of steel futures market.Based on the definition of the conditional risk value and the returns and the variance of the hedging portfolio,the function expression of the conditional risk value and the hedging portfolio returns is constructed.The optimal futures hedge ratio is obtained by minimizing the conditional risk value.Then we analyze the factors of the optimal hedging ratio,and discuss the relationship between the investor’s risk preference and the optimal hedging ratio further.This paper analyzes the CVaR optimal hedging ratio,the minimum variance hedging ratio and the VaR optimal hedging ratio of the deformed steel futures,wire futures and hot rolled coil futures listed on the Shanghai Futures Exchange,and compares the efficiency of the three hedging ratios.It has been illustrated that the CVaR-based futures hedging the best results.The empirical researches also find that the CVaR-based futures hedging are considered to combine the tail risk,expected return,and investor risk appetite.The optimal hedging ratio reflects the speculative demand and hedging demand of the hedger,and the speculative atmosphere in hot rolled coil market is stronger than that in the deformed steel market and wire market.(5)As the lower partial moment(LPM)risk measure compensates for previous deficiencies in bilateral risk measures,LPM is used to control hedging portfolio risk.In order to characterize the frequent price jump,time-varying return volatility and the asymmetric negative relationship between returns and volatility in futures market price stochastic process,the Copula-GARCH method describing the asset spot price and forward price is applied to China’s steel futures market.The t-distribution is employed to capture the high peak and skew properties of the financial assets.Taking the stochastic fluctuation factor of the financial asset yield and the non-linear dependency of the multinational variables of the financial assets into account,the GARCH model is utilized to describe the tail shape of the returns sequence,thus constructing the Copula-GARCH-t model to describe the joint distribution of spot and futures portfolio yields,which solves the difficulties of LPM due to unknown initial density.Through the empirical study,we found that the Frank-Copula function can better reflect the tail risk model.For the deformed steel futures and wire futures,employing LPM to control financial risk,Copula-GARCH model to describe the distribution of asset returns will produce better hedging strategy effect than that employing traditional minimum variance hedging,which illustrates the superiority of the model.In this paper,the non-linear characteristics of China’s steel futures market are analyzed by using the complexity theory.Combining the basis risk index with the risk value index considering the extreme value loss,this paper puts forward the VaR method to measure the risk value of the base difference.On the basis of this,the hedging performance of steel futures market is analyzed from the perspective of risk premium effect,conditional risk value risk measure and lower partial moment risk measurement method respectively.Under the background of the classical variance minimization measure,the relationship between the convenience yields adjusted volatility risk of the futures risk premium,the risk of skewness and the maturity period is investigated.From the perspective of extreme tail risk loss,the optimal hedging based on CVaR measure is calculated.Considering the non-Gaussian phenomenon in financial market,the non-normal distribution and non-linear dependency are introduced into the returns modeling.And the optimal hedging ratio based on LPM is calculated as well as the hedging strategy efficiency utilizing the Copula-GARCH method based on LPM.Some consistent findings have been concluded from different perspectives using different research methods,such as the China’s steel futures market is in the buyer-led market,with the deformed steel futures hedger display higher degree of risk aversion than wire futures hedger,and the hot-rolled coil futures market show heavier speculation atmosphere.The conclusion provides basis and reference for policy makers and market regulators.