IF300Futures Hedging Ratio Resarch

Since April16,2010, Chinese stock investors could hedge the system riskby IF300futures.Then, how to decide the hedging ratio is a question generallyconcered by investors, because of too high futures position means excessive risk hedging, which makes investors’futures position contain a speculative component, conversely, too low futures position means that risk hedging is inadequate, which makes the investors’spot position risk exposure.Conventional hedging analasis adopted a portfolio approach to determine the optimal hedge strategy via expected-utility maximiza-tion such as mean-variance framework. Minimum variance hedging ratio which then follows as a special case is widely used because of two reasons:first, when futures prices satisfysome sufficient and necessary conditions, the minimum variance hedging ratio is also an optimal hedge ratio and optimality holds irrespective of the hedger’s utility function; second, minimum variance hedging ratio can be easily estimate by simple OLS estimate, and the hedging effectiveness can be measured by R-square. Although this paradigm is quite well accepted in practice, minimum variance hedging ratio is still widely questioned.Firstly, the use of variance as a measure of risk is questioned. It is argued that as far as hedging is concerned.a one-sided measure such as the downside risk is morerelevant. Secondly, it iswell-known that the mean-variance portfolio theory is based on the assumptionsthat either the asset returns are normally distributed or the utility functions of decision makers are quadratic. However the first assumption has often been refuted empirically, the second assumption leads to the implausible conclusion that decision makes exhibit increasing absolute risk aversion.In addition, in recent years, as the development of research on coherent risk measure, CVaR (conditional value at risk) was proved to be coherent risk measure. Besides, CVaR as a one-side risk measure can better reflect the hedgers’psychological characteristics. Based on the above considerations as well as the weekness of minimum variance hedging ratio, this research is aimed at applying CVaR portfolio theory to the hedging ratio study, and take CVaR hedging ratio and minimum variance hedging ratio into comparison study. What’s more, this research introduces Copula to CVaR hedging ratio in order to much better reveal the spot and futures’joint distribution.The main work of this thesis takes a study on comparing CVaR hedging ratio with minimum variance hedging ratio on the condition that returns are both saymmetric distribution and asymmetric distribution. The output of this resarch suggests that when returns are saymmetric distribution CVaR hedging ratio do not significantly differ from minimum variance hedging ratio, otherwise they are quite different since CVaR hedging ratio is influenced by hedger’s risk preference. At last, this thesis takes IF300futures as empirical study. The study results show that: first, when returns are symmetric distribution, CVaR hedging ratio is consistent with minimum variance hedging ratio; second, when returns are asymmetric distribution, CVaR hedging ratio can better reflect hedgers’psychological characteristics that they are more willing to avoiding downside risk and reflect more hedging flexibility since the hedgers’may choose different hedging ratios according to the different risk preference.