Hedging Market Risk with the Index: Experiment Based on Chinese Stock Market

Abstract

The index can be seen as a reflection of the market. Index futures, also known as stock index futures, are financial derivatives whose value is based on the performance of the whole market. As a consequence, investors can hedge the market risk by longing or shorting some specific value of index futures. Based on the idea, the paper tried to hedge the market risk and have a deeply look into whether it works and what characteristics it has. The paper chooses 10 stocks from those who are the components of the three main Index in China. The results show that with all the hedging strategies, volatility is effectively reduced and the ROI significantly increased during the period with acute value changes. The paper refined the whole experiment by randomly choosing the stocks with python and comparing the stock selection within the industry. The experiment verify the feasibility and the effectiveness of the hedging strategies based on the Index.