Risk Spillovers and Hedging in the Chinese Stock Market: An Asymmetric VAR-BEKK-AGARCH Analysis

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Risk Spillovers and Hedging in the Chinese Stock Market: An Asymmetric VAR-BEKK-AGARCH Analysis

Journal Title: Acadlore Transactions on Applied Mathematics and Statistics - Year 2023, Vol 1, Issue 3

Abstract

In the present investigation, the phenomena of multi-scale volatility spillovers and dynamic hedging within the Chinese stock market are scrutinized, with particular emphasis on the implications of structural breaks. The decomposition of the returns from the CSI 300 and Hang sheng index’ spot and futures is achieved through the application of the Maximum Overlap Discrete Wavelet Transform (MODWT), categorizing the data into three distinct temporal scales: short-term, medium-term, and long-term. An enhancement upon the conventional VAR-BEKK-GARCH (Vector Autoregressive - Baba, Engle, Kraft, and Kroner - Generalized Autoregressive Conditional Heteroskedasticity) model is proposed, yielding the asymmetric VAR-BEKK-GARCH Model (VAR-BEKK-AGARCH), which adeptly integrates the structural break of return volatility. A comprehensive analysis is conducted to elucidate the interactions and spillovers between the CSI 300 and Hang Seng Index, as well as their respective spot and futures markets, across the various identified time scales. Concurrently, a dynamic hedging portfolio, comprised of index spot and futures, is meticulously constructed, with its performance rigorously evaluated under the influence of the different time scales. To ensure the robustness and validity of the findings, wavelet coherence and phase difference methodologies are employed as verification tools. The results unequivocally reveal a heterogeneity in the behavior of mean spillover, volatility spillover, and asymmetric spillovers between the spot and futures markets of the CSI 300 and Hang Seng Index across the diverse scales. The inclusion of a structural break in the dynamic hedge portfolio is demonstrated to confer a marked advantage over its counterpart that omits this critical factor. Particularly in the short and medium-term scenarios, the dynamically hedged portfolio, enriched by the consideration of the structural break, exhibits superior performance in comparison to the static hedge portfolio. Additionally, it is discerned that the CSI 300 Index and Hang Seng Index, along with their spot and futures components, predominantly manifest in synchrony, with no clear indication of a consistent leader-lag relationship. An intensification of correlation is observed in the long-term analysis, underscoring the utility of the spot and futures of the two indices as efficacious hedging tools.

Authors and Affiliations

Jia Wang, Xun Huang, Xu Wang

Keywords

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EP ID EP732904
DOI 10.56578/atams010301
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