Abstract
Although stock option markets have grown dramatically over the past several decades, the relation between an option and its underlying asset, especially bidirectional conduction, is not particularly clear. So far, there have been many debates about this topic. We try to investigate this problem from a novel angle: an artificial stock market including a stock option is constructed in this paper. The model includes two parts, one is a stock trade module based on the Santa Fe Institute Artificial Stock Market (SFI-ASM), and the other is an option trade module. In the latter module, three types of option traders are employed. The results show that the model is effective, and experiments illustrate that option markets have a remarkable effect on stock markets. Furthermore, by appending options, the model replicates some stylized properties, such as volatility clustering and GARCH effect, which can be observed in real financial markets.
Highlights
In the past few decades, there has been an explosive growth on derivative securities in financial markets
We focus on the information flow in financial markets and handle it as a continuous diffusion process among market participants between stock market and option market, where the information diffusion is modeled by price and volume
In order to study the effect of option markets on stock markets, we presented a model of a European option market in this paper
Summary
In the past few decades, there has been an explosive growth on derivative securities in financial markets. The impact of this growth on the World economy is immense and can influence the stability of financial markets. Many people attribute the cause of the financial crisis to financial innovations which were perceived as being out of control. Others take the opposite view; they think that financial derivatives can stabilize financial markets. This disagreement emanates from the unclear mechanism of action between financial derivatives and their underlying assets. Options are an important component in a wide variety of financial derivatives. The two financial markets can be considered as a simple network with bidirectional information diffusion
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
