An Empirical Study Of Hedging Ratios Of Stock Index Futures

Stock market risk includes systematic risk and non-systematic risk. Non-systematic risk can be avoided through diversified investment, while the stock index futures are the best tools to prevent systemic risk. The main functions of stock index futures are hedging, arbitrage and leveraged investment instruments. Among them hedging is the most basic and the most important function, and it is a useful way to manage stock risk for most stock investors. However, the stock index futures hedging depends largely on the effectiveness of the hedge ratio, therefore, determine the hedge ratio is the core issue of the stock index futures hedging theory.On October 30 2006, China's CSI 300 stock index futures began simulates trading in China Financial Futures Exchange. After 3 years of time, stock index futures were officially listed for trading on April 16 2010. Therefore, personalized research of hedging ratios of CSI 300 Index futures became a hot topic for futures research in recent years. This paper considered CSI 300 index futures as the research object, based on static and dynamic hedging model, and find an optimum method for determining the stock index futures hedge ratio, estimating the minimum risk hedge ratio and providing a better theory and practice guidance for investors to use the CSI 300 stock index futures for hedging.In this paper, the static hedging model mainly used ordinary least squares regression (OLS), two-variable vector auto regression model (B-VAR) and error correction model (ECM). In addition, the dynamic hedging model mainly used generalized autoregressive conditional heteroskedasticity model (GARCH) and error correction GARCH model (ECM-GARCH). Meanwhile, this paper presented the comparison of the positive effects of the various hedging model, where OLS behaved best among the static models, while GARCH and ECM-GARCH effects is superior to OLS among the model models.In addition, this paper presented a research about the short-term and long-term effect of the introduction of stock index futures on Chinese spot market. It helps people to correctly understand relationships between the stock index futures and stock market, and able to correctly respond to the related changes for the stock index futures market and stock market. Finally, by TARCHå’ŒEGARCH models the empirical results showed that index futures would cause fluctuations on the stock market in the short term, but be not big impact on the volatility of the spot market in the long term. At the same time, it would weaken the non-symmetrical effect of spot market. By Granger causality test, impulse response function and forecast error variance decomposition Commonly proof the results that we can't prove that the stock index futures have the cascade effect on the spot market during stock market crash period.