Complex Econometric Models and the Effectiveness of Futures Hedging:Based on Empirical Research Over Environment Shift Sample Period

The debate on econometric models for estimating the minimum-variance futures hedge ratios has run for long time.According to the econometric theory,it is generally thought that,when the econometric test is satisfactory,the complicated econometric models should bring the better hedging efficiency than the simple econometric models. But considerable empirical studies find that the hedging performances of the complex econometric models are not sure better than the simple econometric models.Therefore,the relationship between the complexity of the econometric model and the efficiency of futures hedging is worthy of further study. From the perspective of risk of econometric models,this article study the questions aboutthe complexity of econometric models and the efficiency of futures hedgingover environment shift sample period.A strand of the literature on futures hedge find the fact that the dynamic relationship between spot and futures returns may be characterized by market regime shifts. So,in this paper,we propose random coefficient Markov regime switching model to estimate optimal hedge ratio of china's copper futures market. The hedging performance of RCMRS model is compared against B-GARCH,VECM,VAR and OLS model using the minimum variance approaches over both an ex post and ex ante hedge period.The structure of this paper is as follows. The first part is introduction,the second part is the model specification of random coefficient Markov regime switching model,the next third part is the empirical analysis,including the statistical description of the sample data,the unit root test,the Cointegration test and the optimal hedging ratio estimation of RCMRS,B-GARCH,VECM,VAR and OLS model. The fourth part is the hedging efficiency comparison and analysis. Conclusions are given in the last section.The in-sample test finds that complex dynamic models,such as RCMRS and B-GARCH model,have offered no discernable improvement on the simple static models futures hedge. Compared to the in-sample period,the out-of-sample hedge efficiency decrease and the decline of dynamic models are greater than the static models. In the out-of-sample comparison of hedge performance of five models,the dynamic models are significantly outperformed by the static models.The risk of econometric models includes model-misspecification risk and estimation risk. When the relevant econometric test issatisfactory,the model-misspecification risk of complex econometric model may be smaller than simple model. Complex model introduce more noise than simple model and its estimation risk is greater. Therefore,the total risk is uncertain and it is not sure that complex models can bring about the better hedging effect than the simple models. When in the presence of environment shifts,the model-misspecification risk of complex model will be greater than the simple model because it involves more variables and assumptions.So,the total risk of complex model is more than the simple model and the futures hedging performance of complex models will be outperformed by the simple models.