Abstract
With the daily sample of CSI300 index and CSI300 index futures prices, we investigate the market efficiency and hedging effectiveness of the Chinese index futures market. Cointegration test is employed to examine the market efficiency; OLS, the symmetric bivariate GARCH, the asymmetric bivariate GARCH and time-varying copulas are used to estimate hedging effectiveness. The result shows that CSI300 index futures prices are cointegrated with spot prices and are unbiased predictors of future spot prices. The hedging effectiveness of CSI300 index futures is about 91%, so it can help investors to avoid the systematic risk in the spot market well. Besides, the hedge ratio conducted by the OLS model is the best-performed in variance reduction, very closely followed by the time-varying copulas. Since the dynamic hedge ratios are less stable and having pronounced fluctuations, the hedgers had to adjust their futures positions. The static OLS hedge strategy might be indeed a good choice considering the high transaction cost.
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