The Performance of Option—Trading Software Agents: Initial Results

SummaryThe effect of option markets on their underlying markets has been studied intensively since the first option market launched. Despite considerable efforts, including the development of theoretical and empirical approaches, we do not yet have conclusive evidence on this effect. We investigate the effect of option markets, especially that of dynamic hedging, on their underlying markets by using an artificial market. We propose a two-market model in which an option market and its underlying market interact. We confirmed that trading behaviors on expire date are not effect on its underlying market, but dynamic hedging, arbitrage trading changed volatility on the price of underlying asset under certain conditions.

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How Does High Frequency Risk Hedge Activity Have an Affect on Underlying Market?: Analysis by Artificial Market Model

Kawakubo¹,

Izumi²,

Yoshimura³

2014

J. Adv. Comput. Intell. Intell. Inform.

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The effect of option markets on their underlying markets has been studied intensively since the first option contract was listed. Despite considerable effort, including the development of theoretical and empirical approaches, we do not yet have conclusive evidence on this effect. We investigate the effect of option markets, especially that of dynamic hedging, on their underlying markets by using an artificial market. We propose a two-market model in which an option market and its underlying market interact. In our model, there are three types of agents, underlying local agents trading only on the underlying market, option local agents who trade only on the option market, and global agents who trade both on the underlying and the option market. In this simulation, we investigate the effect of hedgers, a global agent, to the underlying market. Hedgers who have option contracts trade the underlying asset to keep a delta neutral position. This hedge behavior is called dynamic hedging. We simulate two scenarios; one is the hedge with low frequency and the other is the hedge with high frequency that hedger can send hedge order anytime when hedge miss appears. We confirmed that dynamic hedging increases or decreases the volatility of the underlying market under certain conditions.

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The Performance of Option—Trading Software Agents: Initial Results

Cited by 3 publications

References 5 publications

Grid Resource Allocation by Means of Option Contracts

Grid Resource Allocation by Means of Option Contracts

Analysis of the Interaction between Option Market and Its Underlying Market by Coupled Artificial Markets

How Does High Frequency Risk Hedge Activity Have an Affect on Underlying Market?: Analysis by Artificial Market Model

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