Hedging effectiveness of Chinese Treasury bond futures: New evidence based on nonlinear analysis

Using multifractal detrended fluctuation analysis (MF-DFA) and multifractal detrended cross-correlation analysis (MF-DCCA) methods, this paper investigates the hedging effectiveness of Chinese Treasury bond futures. We utilize MF-DFA approach and show that Treasury bond spot and futures markets are multifractal. Moreover, results based on MF-DCCA suggest persistent cross-correlation between 10-year Treasury bond spot and futures, but no significant cross-correlation between 5-year Treasury bond spot and futures. Interestingly, there also exists persistent cross-correlation between 10-year Treasury bond futures and other Treasury bonds (5-year and long-term). Results based on MF-CCA verify the persistent cross-correlations above. Our findings imply that 10year Treasury bond futures contracts can serve as better tools to hedge interest rate risk. (C) 2020 Elsevier B.V. All rights reserved.

Automated summary

Using multifractal analysis methods, this paper found that Chinese Treasury bond spot and futures markets exhibit multifractal characteristics. There is persistent cross-correlation between 10-year Treasury bond spot and futures, making the latter a better tool for hedging interest rate risk.