Research On The Optimal Hedge Ratio Of Fuel Oil Futures In China

One basic function of the futures market is to hedge the risk of price fluctuation, which can be avoided through hedging in the futures market. One of the main theoretical issues in hedging involves the determination of the optimal hedge ratio. Generally, it used to be considered the ratio of hedging as one in the traditional futures market, which is operated simply and easily, but in reality, incomplete hedging strategy is used more frequently, that is to say, the optimal hedge ratio is not one in our society. Then there are many models which are used to measure the optimal hedge ratio, such as OLS model, VEC model, GARCH model, each of which has its own advantages and disadvantages, and many domestic scholars and foreign scholars have researched on this issues. Basis on the previous studies, this paper will study the optimal hedge ratio in our country with OLS model, VEC model, GARCH model, and DVEC-GARCH model, and the data we shall use is every week fuel oil futures price in shanghai futures market. Then we will compare the optimal hedge ratio performance. We hope to find a better model to measure the optimal hedge ratio, in order to promote the function of our futures market to avoid the risk of the price fluctuation.In addition, we study that the future market can be able to avoid the risk of price fluctuations, because the risk of future price fluctuations has been substituted by basis, which is the difference between the spot price and the future price. So in this paper we introduce basis to VEC model and DVEC-GARCH model, which is used to replace the estimated residual series from the spot prices and the future prices. We amend VEC model and DVEC-GARCH model with basis in order to find a better model to calculate the optimal hedge ratio in our real society.