Research on the Value at Risk of Basis for Stock Index Futures Hedging in China Based on Two-State Markov Process and Semiparametric RS-GARCH Model

Abstract EN

This article aims to investigate the Value at Risk of basis for stock index futures hedging in China.

Since the RS-GARCH model can effectively describe the state transition of variance in VaR and the two-state Markov process can significantly reduce the dimension, this paper constructs the parameter and semiparametric RS-GARCH models based on two-state Markov process.

Furthermore, the logarithm likelihood function method and the kernel estimation with invariable bandwidth method are used for VaR estimation and empirical analysis.

It is found that the three fitting errors (MSE, MAD, and QLIKE) of conditional variance calculated by semiparametric model are significantly smaller than that of the parametric model.

The results of Kupiec backtesting on VaR obtained by the two models show that the failure days of the former are less than or equal to that of the latter, so it can be inferred that the semiparametric RS-GARCH model constructed in this paper is more effective in estimating the Value at Risk of the basis for Chinese stock index futures.

In addition, the mean value and standard deviation of VaR obtained by the semiparametric RS-GARCH model are smaller than that of the parametric method, which can prove that the former model is more conservative in risk estimation.