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Program trading and its risk analysis based on agent-based computational finance

Author

Listed:
  • Xiong Xiong

    (College of Management and Economics, Tianjin University, Tianjin 300072, China)

  • Hailiang Yuan

    (College of Management and Economics, Tianjin University, Tianjin 300072, China)

  • Wei Zhang

    (College of Management and Economics, Tianjin University, Tianjin 300072, China)

  • Yongjie Zhang

    (College of Management and Economics, Tianjin University, Tianjin 300072, China)

Abstract

Program trading originates from combination trading technology in 70's in America. It was popular, but once it was considered as root of disaster. Nowadays, there are many divergences on program trading risk in international academic world. This essay is to analyze program trading on risk of stock market. The method adopts computational experiment to build artificial stock market under various experimental conditions. The research will consider two strategies: combination insurance strategy and arbitrage strategy to inspect stock index futures' influences on artificial stock market. Through contrast experiments, it finds that program trading will cause abnormal fluctuation of stock market in short-term period but it will have slight impact on fluctuation of stock market in long-term period. On the whole, stock index futures reduce price fluctuation of spot market. Besides, the research finds that combination insurance strategy will increase short selling expectation in pessimistic market to accelerate market collapse when the market gives the same downside price expectation and the market should consider the influence of combination insurance strategy.

Suggested Citation

  • Xiong Xiong & Hailiang Yuan & Wei Zhang & Yongjie Zhang, 2015. "Program trading and its risk analysis based on agent-based computational finance," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 2(02), pages 1-13.
    • Handle: RePEc:wsi:ijfexx:v:02:y:2015:i:02:n:s2424786315500140
    DOI: 10.1142/S2424786315500140
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    Cited by:

    1. Simplice Asongu & Uduak S. Akpan & Salisu R. Isihak, 2018. "Determinants of foreign direct investment in fast-growing economies: evidence from the BRICS and MINT countries," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 4(1), pages 1-17, December.

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