Abstract
Simultaneous trading of multiple assets is becoming more common in financial markets, but financial analysts argue that it may bring unintended consequences, such as an increase in volatility. Agent-based simulations are useful ways to study market dynamics and acquire information to devise market rules. In this study, we constructed a multi-asset artificial market model and investigated the effect of arbitrage trading among multiple assets on price shock transfer from one asset to the whole market. The model is composed of two sorts of asset: index futures and its underlying stocks (the components of the market index). Our simulation featured two types of agent: local traders and arbitrageurs. A local trader sells or buys a single asset. Arbitrageurs can profit from a price difference between the index futures and the underlying stocks by applying the rule: buy cheap ones and sell expensive ones simultaneously. From exhaustive simulations of various trading strategies of local traders, we found that a shock transfer can be initiated and accelerated by local traders with certain strategies and arbitrageurs. Furthermore, we investigated how arbitrageurs and a market regulation, i.e., trading halt, work together. We found some situations in which trading halts increase market volatility. The implications for market regulations are discussed.
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Notes
The divergence \(\ln (p^{s*}_t / p^{s}_t)\) can be interpreted as the velocity (the magnitude and direction) of price \(p^{s*}_t\) moving toward its mean, which is the initial price because we set the drift term \(\mu ^{s*}_t\) to 0. Accordingly, \(1 / \tau ^{s*}\) determines the time at which the price \(p^{s*}_t\) is expected to revert to its mean.
An exchange-traded fund (ETF) is a security that tracks an index and trades like a single stock on an exchange. In this study, we omit the influences of interest rates, so the index futures are almost the same as an ETF.
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This work was supported by CREST, JST.
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Torii, T., Izumi, K. & Yamada, K. Shock transfer by arbitrage trading: analysis using multi-asset artificial market. Evolut Inst Econ Rev 12, 395–412 (2015). https://doi.org/10.1007/s40844-015-0024-z
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DOI: https://doi.org/10.1007/s40844-015-0024-z