Futures Hedge Ratio under Co-Integration Relationship:an Empirical Study

In this study co-integration test is performed to find out whether there is a co-integration relationship between copper spot price and futures price in Shanghai Futures Exchange.Error correct model is exploited to estimate the futures hedge ratio,aiming at comparing the hedge ratios of the conventional method and error correct model.The findings of this study indicate that the conventional model underestimates the number of futures contracts needed to hedge the spot portfolio.It is also found in this study that futures market appears to be more effective in reducing the price change risk over long-run hedge period than over short ones.