The influence of the COVID-19 pandemic on the hedging functionality of Chinese financial markets

Shaen Corbet; Yang Greg Hou; Yang Hu; Les Oxley

doi:10.1016/j.ribaf.2021.101510

The influence of the COVID-19 pandemic on the hedging functionality of Chinese financial markets

Res Int Bus Finance. 2022 Jan:59:101510. doi: 10.1016/j.ribaf.2021.101510. Epub 2021 Aug 13.

Authors

Shaen Corbet^{1

2}, Yang Greg Hou², Yang Hu², Les Oxley²

Affiliations

¹ DCU Business School, Dublin City University, Dublin 9, Ireland.
² School of Accounting, Finance and Economics, University of Waikato, New Zealand.

Abstract

In this paper, we investigate both constant and time-varying hedge ratios in terms of the effectiveness of CSI300 index futures during the COVID-19 crisis. Using naïve, OLS and EC/ROLS strategies to estimate constant hedge ratios, results indicate that the CSI300 spot index presents decreased effectiveness using the naïve hedging strategy; however, increased effectiveness of OLS and EC hedge ratios are identified. Differential behaviour is identified when considering five newly introduced COVID-19 concept-based stock indices. Time-varying hedge ratios indicate the weakened effectiveness, ranging between 20% and 40% variance reduction. Evidence suggests that the capability of the CSI300 index futures to hedge against the risks of the COVID-19 is impaired, regardless of whether constant or time-varying hedge ratios are used. Such results provide important implications to both local and foreign investors in the Chinese stock market.

Keywords: COVID-19; China; Diversification; Financial markets; Hedge ratios.