The Research On Hedging Performance Of Futures Market:an Empirical Analysis Of SHFE AL Futures Market In Our Country

Hedging, which includes long hedging and short hedging, is an important function of future market. Financial derivatives are used by a growing number of investors to avoid systematic risk. The key issue of futures markets is the determination of hedge ratio. SHFE AL future can be used to eliminate spot price fluctuation risk.This paper mainly contains five parts:The first part introduces the history, current situation and development of SHFE AL futures. Then it summarizes and reviews the hedging theory research at home and abroad,which lays the methodology foundation for authentic proof research.The second part firstly introduces future market’s function and futures price theories. The futures price theories include Cost-of-Carry-Model and Rational expectation theory.Then it introduces the concept of basis, its function on hedging and the method of dealing with abnormal basis fluctuation. Basis is an important factor which the hedgers need to consider during the hedging process. Hedgers take the Basis risk instead of price risk.The third part is the review of the futures hedging model. Firstly, it briefly introduces the economics principle and the premise of hedging. Secondly, it introduces two kinds of static hedging model:OLS model and B-VAR model. And it also introduces four kinds of dynamic hedging models:ECM-GARCH model, DVEC-GARCH model,DBEKK-GARCH model and Copula-GARCH model. At the end of this part it derives the minimum variance optimal hedge ratio and its formula, then it introduces two kinds of hedging performance evaluation method, which include minimum variance index and utility maximization index.In the fourth part, it is the empirical research of hedging performance between SHFE AL future and its spot. It reviews the tendency of SHFE AL future in the first. From the descriptive statistics of each time series, it is easy to notice that the volatility of future market is greater than the spot, and the spot and future series are not subject to normal distribution.ADF test shows that both spot and future return series are I(1). There is cointegration relationship between the spot and futures return series by EG cointegration test. Then, this part uses OLS model、 DVECH-GARCH model、DBEKK-GARCH model and two Copula-GARCH models to estimate the optimal hedge ratio respectively with their optimal hedge ratio0.481618、0.527923、0.518687、0.50477and0.5042238successively. ADF tests show that both the dynamic optimal hedge ratios are I (1).Lastly, it compares the hedging performance of the three models by minimum variance index and utility maximization index, the conclusions are as follows:(1)The Copula-GARCH model’s utility level is the highest with OLS model lowest regardless of the coefficient of risk aversion.(2)Taking into account the transaction costs,it compares the utility between dynamic hedging model and static hedging model. When the commission rate is less than6.548E-05, investors should choose t-Copula-GARCH model. When the rate is greater than6.548E-05, investors will choose the OLS model.At the last part of this paper, it summarizes the whole paper and prospects the further research.The possible innovations of the paper are as follows:First, it introduces the ECM to Copula-GARCH model to solve the cointegration and residual heteroscedasticity.Second, in this paper it uses the mean variance utility function to evaluate the hedging performance of the three models.Third, Considering the transaction cost of the dynamic hedging, it solves the hedging model selection under different commission rate.