Optimal Hedge Ratio and the Performance of Hedging in China´s Cotton Futures Market

This paper does empirical study on the performance of hedging in China´s cotton futures market. The ordinary least squares model (OLS), the bi-variate vector autoregressive model (BVAR) and the error correction mechanism model (ECM) are used to find the optimal hedging ratio. The results show that the optimal hedging ratio and the performance of hedging of weekly data exceed those of daily data. The results also indicate that the hedging ratio and performance using ECM are better than those using OLS and BVAR, so hedging strategies which use ECM model are better than those which use OLS and BVAR model; in the meantime, out-of-sample hedging performance is superior to those of in-sample.