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Determining the multi-scale hedge ratios of stock index futures using the lower partial moments method

Jun Dai, Haigang Zhou and Shaoquan Zhao

Physica A: Statistical Mechanics and its Applications, 2017, vol. 466, issue C, 502-510

Abstract: This paper considers a multi-scale future hedge strategy that minimizes lower partial moments (LPM). To do this, wavelet analysis is adopted to decompose time series data into different components. Next, different parametric estimation methods with known distributions are applied to calculate the LPM of hedged portfolios, which is the key to determining multi-scale hedge ratios over different time scales. Then these parametric methods are compared with the prevailing nonparametric kernel metric method. Empirical results indicate that in the China Securities Index 300 (CSI 300) index futures and spot markets, hedge ratios and hedge efficiency estimated by the nonparametric kernel metric method are inferior to those estimated by parametric hedging model based on the features of sequence distributions. In addition, if minimum-LPM is selected as a hedge target, the hedging periods, degree of risk aversion, and target returns can affect the multi-scale hedge ratios and hedge efficiency, respectively.

Keywords: Downside risk; Wavelet decomposition; Multi-scale hedge ratio (search for similar items in EconPapers)
Date: 2017
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