Estimation and Comparative of Dynamic Optimal Hedge Ratios of China Gold Futures Based on ECM-GARCH
Authors: Chen Pujiang , Zhuo Zirong , Liu Jixiang 
Published: March 2016

<span style="font-size: 10pt; font-family: 'Times New Roman',serif; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: 宋体; mso-font-kerning: 1.0pt; mso-ansi-language: EN-US; mso-fareast-language: ZH-CN; mso-bidi-language: AR-SA;" lang="EN-US">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 become a hot topic. We employ gold future prices and spot gold prices in China market and the time period covered was January, 2014 to June, 2015 and calculate the optimal hedge ratios using different static and dynamic models. The static hedge model mainly used Ordinary Least Squares Regression</span><span style="font-size: 10pt; font-family: 宋体; mso-bidi-font-size: 11.0pt; mso-font-kerning: 1.0pt; mso-ansi-language: EN-US; mso-fareast-language: ZH-CN; mso-bidi-language: AR-SA; mso-ascii-font-family: 'Times New Roman'; mso-hansi-font-family: 'Times New Roman'; mso-bidi-font-family: 'Times New Roman';">（</span><span style="font-size: 10pt; font-family: 'Times New Roman',serif; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: 宋体; mso-font-kerning: 1.0pt; mso-ansi-language: EN-US; mso-fareast-language: ZH-CN; mso-bidi-language: AR-SA;" lang="EN-US">OLS</span><span style="font-size: 10pt; font-family: 宋体; mso-bidi-font-size: 11.0pt; mso-font-kerning: 1.0pt; mso-ansi-language: EN-US; mso-fareast-language: ZH-CN; mso-bidi-language: AR-SA; mso-ascii-font-family: 'Times New Roman'; mso-hansi-font-family: 'Times New Roman'; mso-bidi-font-family: 'Times New Roman';">）</span><span style="font-size: 10pt; font-family: 'Times New Roman',serif; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: 宋体; mso-font-kerning: 1.0pt; mso-ansi-language: EN-US; mso-fareast-language: ZH-CN; mso-bidi-language: AR-SA;" lang="EN-US">, Error Correction Model</span><span style="font-size: 10pt; font-family: 宋体; mso-bidi-font-size: 11.0pt; mso-font-kerning: 1.0pt; mso-ansi-language: EN-US; mso-fareast-language: ZH-CN; mso-bidi-language: AR-SA; mso-ascii-font-family: 'Times New Roman'; mso-hansi-font-family: 'Times New Roman'; mso-bidi-font-family: 'Times New Roman';">（</span><span style="font-size: 10pt; font-family: 'Times New Roman',serif; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: 宋体; mso-font-kerning: 1.0pt; mso-ansi-language: EN-US; mso-fareast-language: ZH-CN; mso-bidi-language: AR-SA;" lang="EN-US">ECM</span><span style="font-size: 10pt; font-family: 宋体; mso-bidi-font-size: 11.0pt; mso-font-kerning: 1.0pt; mso-ansi-language: EN-US; mso-fareast-language: ZH-CN; mso-bidi-language: AR-SA; mso-ascii-font-family: 'Times New Roman'; mso-hansi-font-family: 'Times New Roman'; mso-bidi-font-family: 'Times New Roman';">）</span><span style="font-size: 10pt; font-family: 'Times New Roman',serif; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: 宋体; mso-font-kerning: 1.0pt; mso-ansi-language: EN-US; mso-fareast-language: ZH-CN; mso-bidi-language: AR-SA;" lang="EN-US">and Vector Error Correction Model</span><span style="font-size: 10pt; font-family: 宋体; mso-bidi-font-size: 11.0pt; mso-font-kerning: 1.0pt; mso-ansi-language: EN-US; mso-fareast-language: ZH-CN; mso-bidi-language: AR-SA; mso-ascii-font-family: 'Times New Roman'; mso-hansi-font-family: 'Times New Roman'; mso-bidi-font-family: 'Times New Roman';">（</span><span style="font-size: 10pt; font-family: 'Times New Roman',serif; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: 宋体; mso-font-kerning: 1.0pt; mso-ansi-language: EN-US; mso-fareast-language: ZH-CN; mso-bidi-language: AR-SA;" lang="EN-US">VECM</span><span style="font-size: 10pt; font-family: 宋体; mso-bidi-font-size: 11.0pt; mso-font-kerning: 1.0pt; mso-ansi-language: EN-US; mso-fareast-language: ZH-CN; mso-bidi-language: AR-SA; mso-ascii-font-family: 'Times New Roman'; mso-hansi-font-family: 'Times New Roman'; mso-bidi-font-family: 'Times New Roman';">）</span><span style="font-size: 10pt; font-family: 'Times New Roman',serif; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: 宋体; mso-font-kerning: 1.0pt; mso-ansi-language: EN-US; mso-fareast-language: ZH-CN; mso-bidi-language: AR-SA;" lang="EN-US"> 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.</span>