Research On The Hedging Effectiveness Of Chinese Precious Metals Futures Based On Log Return And Range Yield

In 2015, the prices of gold and other non-ferrous metal continued to slump because of U.S. economic recovery and Federal Reserve interest rate hike expectation. In addition, the pressure of the domestic economy downward was increasing which made the demand for non-ferrous metals market depressed. In face of this economic situation, the production and operation of precious metals enterprises in our country have been seriously affected. Their profits have been squeezed and even some enterprises have suffered losses. To deal with the risk of gold and other spot prices decline, many enterprises choose to use the capital market tools for hedging.Hedging is one of the basic functions of future market. Enterprises can avoid the risk of spot market prices decline through hedging. The key to the study of hedging is to estimate the optimal hedge ratio. A series of models to estimate the optimal hedge ratio have been summarized, and they are divided into two types:static hedging model and dynamic hedging model. This paper describes some of the most commonly used hedge ratio estimation models, including:the OLS model, B-VAR model, ECM model, CCC-GARCH model and ECM-GARCH model.In 2008 and 2012, China launched gold future and silver future respectively, which are the only two precious metals futures in our country, and their hedging effectiveness is this paper’study object. This paper selects the closing price data of the spot market and future market. The sample interval is from January 1,2013 to December 31,2015. The research methods are the five methods mentioned above. This research includes two parts. First, using the five models to estimate the optimal hedge ratio of gold future and silver future that based on log return and range yield. Second, calculating the hedging effectiveness of the hedging portfolios determined by each hedge ratio. The conclusions of the research are as follows:the OLS model is the best model to estimate the hedging ratio of Chinese precious metals futures. And the differences of hedging effectiveness between each model is very small; The hedging effectiveness of hedging portfolios based on range yield is not better than the hedging effectiveness of hedging portfolios based on log return; The hedging effectiveness of Chinese precious metals futures market is high.The hedging effectiveness of silver future is higher than the hedging effectiveness of gold future. And their hedging effectiveness can reach to 93% and 92% respectively.