Model Analysis for Estimating Optimal Hedging Ratio of Stock Index Futures

Abstract

This paper aims at the optimal hedging ratio estimation of stock index futures. The determination of the optimal hedging ratio is the main part of the hedging transaction. There are many hedge ratio calculation method, in which the most important are two: one based on minimizing the risk of portfolio risk and the other based on the maximizing utility of the portfolio. We employ ECM-GARCH model for estimating the risk-minimizing hedging ratio while meanvariance model for the utility-maximizing hedging ratio. First, we analyze the optimal hedge ratio under the principle of risk minimization: the main idea of this method is to minimize the variance of the yield of the portfolio after hedging. Secondly, for investors in the hedging transactions hope to get a certain income, the maximum utility hedging can be engaged to achieve this purpose by the proposed model herein. Finally, the risk minimization hedge ratio and the utility maximization hedge ratio's calculation results are carried out and the comparison being expressed then.