Shock Transfer in Futures and Spot Markets: An Agent-Based Simulation Modelling Method

Abstract

There have been heated debates about the role of stock index futures in the financial market, especially during the crash periods. In this paper, a multiagent spot-futures market model is developed to analyze the micromechanism of shock transfer across spot and futures markets. We assume that there are two stocks and one stock index futures contract in the spot-futures market. Agents are heterogeneous, including fundamentalists, chartists, noise traders, and arbitragers. The spot market and the futures market are linked by arbitragers. The simulation results show that our spot-futures market model can reproduce various important stylized facts, including the price co-movement between stock index prices and index futures prices and the fat-tailed distribution of the returns of risky assets and the basis. Further analysis shows that when we introduce an exogenous fundamental shock to one of the stocks, the backwardation phenomenon appears in the futures market and the shock is widespread across the whole market by means of index futures. Moreover, the backwardation gradually disappears when the number of arbitragers increases. Besides, when there are few arbitragers or when there are sufficient arbitragers, shocks cannot be transferred to other stocks via the futures market, while an intermediate level of arbitrage will amplify the shock transfer and hurt market stability. These findings underscore that arbitragers play an important role in spot-futures market interaction and shock transfer, and adequate arbitrage trading during crises may help eliminate the positive basis and halt the further spread of the crises.

Research on a Prediction Model and Influencing Factors of Cross-Regional Price Differences of Rebar Spot Based on Long Short-Term Memory Network

“…Kannika and James [38] focus on the single spot market and make probabilistic forecasts for natural gas in eight spot markets. Zhou and Li [39] underscore that arbitragers play an important role in spot-futures market interaction and shock transfer, and adequate arbitrage trading during crises may help eliminate the positive basis and halt the further spread of crises. Song and Xing [40] argued that after the implementation of the continuous trading system, Shanghai copper has a better price discovery function than London copper and New York copper futures.…”

Price guidance and discovery of the Chinese stock index Futures: Based on the rising, falling and fluctuating states

“…Similarly, Yang et al [ 23 ] used agent-based modeling to build a theoretical model of the order book and discovered that speculators, arbitrageurs, and hedgers play distinct roles in Chinese markets. Furthermore, Zhou & Li [ 24 ] constructed a multiagent spot-futures market model to examine the micromechanics of shock transfer and observed that arbitrageurs play a substantial role in spot-futures market contact and that appropriate arbitrage trading during crises can aid in reducing the positive basis and preventing the further spread of crises.…”