Dynamic Hedging Performance of the CSI 300 Index Futures - The Realized Minimum-Variance Hedge Ratio Approach

35 Pages Posted: 19 Mar 2018

See all articles by Hui Qu

Hui Qu

Nanjing University

Tianyang Wang

Colorado State University - Department of Finance & Real Estate

Yi Zhang

Nanjing University

Pengfei Sun

Nanjing University

Date Written: March 14, 2018

Abstract

This paper comprehensively investigates the dynamic hedging performance of China’s CSI 300 index futures by using the realized minimum-variance hedge ratio (RMVHR) as an efficient way to utilize the high-frequency intraday information. We thoroughly examine a number of RMVHR-based time-series models for CSI 300 index futures, and evaluate the out-of-sample dynamic hedging performance in comparison to the conventional hedging models using daily prices, as well as the vector heterogeneous autoregressive model using five-minute prices. Our results show that the dynamic hedging performance of the RMVHR-based methods robustly dominates that of the conventional methods in terms of major performance measures including the hedge ratio, the hedging effectiveness, the portfolio return and the Sharp ratio in the out-of-sample forecast period. Furthermore, the superiority of the RMVHR-based methods is consistent during different volatility regimes of China’s financial markets, including China’s abnormal market fluctuations in 2015.

Keywords: Realized Minimum-Variance Hedge Ratio; Dynamic Hedging Performance, High-Frequency Data; Hedging Effectiveness; Volatility Regime

JEL Classification: G1, G01, G13

Suggested Citation

Qu, Hui and Wang, Tianyang and Zhang, Yi and Sun, Pengfei, Dynamic Hedging Performance of the CSI 300 Index Futures - The Realized Minimum-Variance Hedge Ratio Approach (March 14, 2018). Available at SSRN: https://ssrn.com/abstract=3140789 or http://dx.doi.org/10.2139/ssrn.3140789

Hui Qu

Nanjing University ( email )

Nanjing, Jiangsu 210093
China

Tianyang Wang (Contact Author)

Colorado State University - Department of Finance & Real Estate ( email )

Finance and Real Estate Department
1272 Campus Delivery
Fort Collins, CO 80523
United States

Yi Zhang

Nanjing University ( email )

Nanjing, Jiangsu 210093
China

Pengfei Sun

Nanjing University ( email )

Nanjing, Jiangsu 210093
China

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