Hedging models and effectiveness in Chinese futures market

With the database of daily copper futures contracts on Chinese market, optimal hedge ratios are calculated applying the ordinary least squares(OLS) regression model, the error-correction model(ECM), and the multivariate Garch model. The hedging effectiveness is measured in terms of ex-post and ex-ante at various hedging horizons. It is proved that the time varying hedge ratios provide more portfolio risk reduction, multivariate Garch model performs better only for shorter hedging horizons. Empirical results show the weakness of the function of price discovery in Chinese market, and the hedge effectiveness limit.