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Study About the Minimum Value at Risk of Stock Index Futures Hedging Applying Exponentially Weighted Moving Average - Generalized Autoregressive Conditional Heteroskedasticity Model

Author

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  • Rong Xu

    (University of Shanghai for Science and Technology, Shanghai, China)

  • Xingye Li

    (University of Shanghai for Science and Technology, Shanghai, China)

Abstract

What investors often wish to insure is that the maximum possible loss of their portfolios falling below a certain value. Namely, the maximum possible loss that a portfolio will lose under normal market fluctuations, with a given confidence level, over a certain time horizon, it is known shortly as value at risk (VaR). However, when it comes to the hedging strategy taking in the derivative markets for the minimum VaR, many investors simply thinking it is a hedging ratio in one at beginning, then a lot of effective model came out from both academia and industry over the years.We pioneer deriving a combined and dynamic hedging model- exponentially weighted moving average-generalized autoregressive conditional heteroskedasticity (GARCH) (1,1)-M applicable to the real financial markets based on previous studies. The results in this paper turn out that the model we build is not only excellent for the pursuit for the minimum VaR but also practical for the actual situation where the variances of financial price data are time-varying.In this paper we calculate the optimal decay factor 0.93325 which is the best match to the Hu-Shen 300 stock index market, withdraw uniform 0.9400, and use the Cornish-Fisher function to correct the quantile of the normal distribution, get the final hedging ratios and the minimum VaR.

Suggested Citation

  • Rong Xu & Xingye Li, 2017. "Study About the Minimum Value at Risk of Stock Index Futures Hedging Applying Exponentially Weighted Moving Average - Generalized Autoregressive Conditional Heteroskedasticity Model," International Journal of Economics and Financial Issues, Econjournals, vol. 7(6), pages 104-110.
    • Handle: RePEc:eco:journ1:2017-06-13
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    References listed on IDEAS

    as
    1. Menelaos Karanasos, "undated". "Prediction in ARMA models with GARCH in Mean Effects," Discussion Papers 99/11, Department of Economics, University of York.
    2. Zhiguang Cao & Richard D.F. Harris & Jian Shen, 2010. "Hedging and value at risk: A semi‐parametric approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 30(8), pages 780-794, August.
    3. Menelaos Karanasos, 2001. "Prediction in ARMA Models with GARCH in Mean Effects," Journal of Time Series Analysis, Wiley Blackwell, vol. 22(5), pages 555-576, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Minimum Value At Risk; Hedging Model; Decay Factor; Cornish-Fisher; Exponentially Weighted Moving Average -Generalized Autoregressive Conditional Heteroskedasticity (1; 1)-M Model;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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