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

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.