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.
Highlights
In 2015, China’s stock market experienced a roller coaster ride
During the market crises in 2015, the daily turnover in CSI 300 index futures rocketed up to 2 million. During this crash, stock index futures prices dropped lower than stock index prices and this backwardation anomaly persisted for a long time
We introduce 300 fundamentalists, 150 chartists, and 150 noise traders into our artificial spotfutures market, and these local traders invest on each asset with same probability, namely, there are 100 fundamentalists, 50 chartists, and 50 noise traders trading on each risky asset
Summary
In 2015, China’s stock market experienced a roller coaster ride. From mid-July 2014 to mid-June 2015, the CSI 300 index climbed almost 150%, reaching a seven-year high of 5380. e bubble, broke on June 12, 2015, and the stock market collapse began. During the market crises in 2015, the daily turnover in CSI 300 index futures rocketed up to 2 million During this crash, stock index futures prices dropped lower than stock index prices and this backwardation anomaly persisted for a long time. After the October 1987 stock market crash, the well-known Brady Commission report stated that the interaction of index arbitrage and portfolio insurance across the spot and futures markets was the cause of this collapse. Is backwardation encouraged arbitragers to sell stocks and purchase index futures, further depressing spot prices. Xu et al [41] constructed an artificial spot-futures market model with crossmarket traders and successfully reproduced the typical characteristics of Chinese stock market and the CSI 300 index futures market.
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