Spot-Futures Market Interaction and the Impact of Arbitrage: An Agent-Based Modelling Method

Xuan Zhou (), Qingzuo Kuang () and Honggang Li ()
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Xuan Zhou: Beijing Jiaotong University
Qingzuo Kuang: Beijing Normal University
Honggang Li: Beijing Normal University

A chapter in IEIS 2020, 2021, pp 259-271 from Springer

Abstract: Abstract We establish a spot-futures market model based on heterogeneous multi-agent and cross-market traders to study the interaction between stock index futures market and spot market. In our model, spot market and futures market are linked through cross-market traders. The simulation results show that our spot-futures market model reproduces some stylized facts in financial markets such as the price co-movement between the two markets and the fat-tailed distribution of the basis. In addition, by changing the number of arbitrageurs, we study the impact of arbitrage behavior on market liquidity, volatility and price efficiency. The results show that introducing the futures into spot market can decrease volatility, and increase liquidity and price efficiency. However, a further increase in arbitragers proportion will increase volatility and expand spot futures basis, which will hurt the market stability and price efficiency.

Keywords: Agent-based modelling; Continuous double auction; Spot-futures market; Arbitrager (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-981-33-4363-4_20

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DOI: 10.1007/978-981-33-4363-4_20

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