Abstract
Since their introduction in 1973, options have become an important and very popular financial instrument. However, despite much research performed on the subject, the effects of option trading on the underlying asset market are still debated. Both empirical and theoretical studies have failed to point out how price volatility and volumes of the underlying asset are affected. In this paper we present the first study on the effects of an option market related to an underlying stock market, using an artificial financial market based on heterogeneous agents. We modeled a realistic European option using two market models. The microstructure of the first model is kept as simple as possible, being composed only of random traders. The second model is more complex and realistic, involving the presence of various kinds of trading strategies (random, fundamentalist and chartist). We show that the introduction of options, in the proposed models, tends to decrease the volatility of the underlying stock price. Moreover, the traders’ wealth can be strongly affected by the use of option hedging.
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Ecca, S., Marchesi, M. & Setzu, A. Modeling and Simulation of an Artificial Stock Option Market. Comput Econ 32, 37–53 (2008). https://doi.org/10.1007/s10614-008-9134-6
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DOI: https://doi.org/10.1007/s10614-008-9134-6