Evaluating the performance of futures hedging using factors-driven realized volatility |
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Institution: | 1. Business School, Hunan University, Changsha 410082, China;2. Center for Resource and Environmental Management, Hunan University, Changsha 410082, China;1. School of Accountancy, Southwestern University of Finance and Economics, 555 Liutai Road, Chengdu, China;3. Institute of Accounting and Finance, Shanghai University of Finance and Economics, 111 Wuchuan Road, Shanghai, China;1. School of Economics and Management, Southwest Jiaotong University, Chengdu, China;2. IPAG Business School (IPAG Lab), 184 boulevard Saint-Germain, 75006 Paris, France;3. Université Paris 8 (LED), 2 rue de la Liberté, 93526 Saint-Denis cedex, France |
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Abstract: | The complexity and uncertainty of the financial market mainly stem from the rich market internal transaction information and a wide range effect of external factors. To this end, this paper proposes the combination factors-driven forecasting method to predict realized volatilities of the CSI 300 index and index futures. Based on the volatilities predicted by the proposed method, we further evaluate the ex-ante hedging performance in comparison to the conventional HAR model as well as GARCH-type models. The empirical results indicate that the factors-driven realized volatility model significantly dominates the other commonly used models in terms of hedging effectiveness. Furthermore, the superiority of the proposed method is robust in different market conditions, including significant rising or falling and abnormal market fluctuations in the COVID-19 pandemic, and in different index markets. Therefore, this paper improves the prediction accuracy of volatility by integrating market internal transaction information and external factor information, and the proposed method in this paper can be used by investors to obtain an excellent hedging effect. |
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Keywords: | Factors-driven realized volatilities Out-of-sample forecasting Ex-ante-hedge-ratio Hedging effectiveness |
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