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Estimation and Comparative of Dynamic Optimal Hedge Ratios of China Gold Futures Based on ECM-GARCH

Author

Listed:
  • Pujiang Chen
  • Zirong Zhuo
  • Jixiang Liu

Abstract

In order to avoid the risk of fluctuations in prices, commodity production operators develop future hedge, in which the evaluation of optimal hedge ratios are the core question. On the other hand, since gold plays an increasingly important role in Chinese economic activities, gold hedge becomes a hot topic. We employ gold future prices and spot gold prices in China market in which the time period covered was from January 2014 to June 2015 and calculate the optimal hedge ratios using different static and dynamic models. The static hedge model mainly use Ordinary Least Squares Regression (OLS), Error Correction Model (ECM) and Vector Error Correction Model (VECM) model. In addition, the dynamic hedge model mainly use bivariate GARCH model (BGARCH model). The results show that the efficiency of hedge of ECM-GARCH model is the best over the sample period.

Suggested Citation

  • Pujiang Chen & Zirong Zhuo & Jixiang Liu, 2016. "Estimation and Comparative of Dynamic Optimal Hedge Ratios of China Gold Futures Based on ECM-GARCH," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(3), pages 236-243, March.
    • Handle: RePEc:ibn:ijefaa:v:8:y:2016:i:3:p:236-243
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    References listed on IDEAS

    as
    1. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
    2. Hsiang-Tai Lee & Jonathan Yoder, 2007. "A bivariate Markov regime switching GARCH approach to estimate time varying minimum variance hedge ratios," Applied Economics, Taylor & Francis Journals, vol. 39(10), pages 1253-1265.
    3. Leland L. Johnson, 1960. "The Theory of Hedging and Speculation in Commodity Futures," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 27(3), pages 139-151.
    4. Kroner, Kenneth F. & Sultan, Jahangir, 1993. "Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(4), pages 535-551, December.
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    More about this item

    Keywords

    gold; hedge ratios; ECM-BGARCH; dynamic model; China;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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