The Behavior and Impact of Heterogeneous Investors in China’s Stock Index Futures Market: An Agent‐Based Model on Cross‐Market Trades

Abstract

Since the period of unusual volatility in China’s A-share market in 2015, there has been an ongoing discussion about the role of stock index futures in the A-share market. There is no unified consensus among academics and industry insiders on whether stock index futures affect spot market volatility. Using agent-based modeling, we construct a theoretical model of the order book of the stock index futures market to assess the microbehavior of speculators, arbitrageurs, and hedgers in this market. We then calibrate the link between the futures and spot models to explore the respective influences of heterogeneous investors in the two markets. We find that speculators, arbitrageurs, and hedgers all play different roles and have varying effects on the two markets. While speculators serve as the foundation for other investors to participate in trading activities, both arbitrageurs and hedgers affect the spot market by significantly reducing volatility, enhancing price efficiency, and playing a positive role in the operation of this market. We develop our model from the perspective of investor behavior and explain why the stock index futures market can reduce spot market volatility. In addition, our conclusion may help regulators understand the roles played by different types of investors in the Chinese stock index futures market.

Market Impact Analysis of Financial Literacy among A-Share Market Investors: An Agent-Based Model

“…The agent-based modeling method has been widely used to evaluate the effectiveness of investment portfolios, predict market volatility, and other aspects. Yang et al (2022) [17] discussed the use of the method in studying market microstructure, financial crises, and market regulation. Dehkordi et al (2023) [18] provided a comprehensive overview of the use of agent-based modeling in finance, including its strengths and weaknesses.…”

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

“…For instance, Xiao and Wu [ 22 ] found that informed traders tend to trade in the stock market when the information reflects the operating conditions of a limited number of companies and in the futures market when the information reflects the overall market position. 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.…”