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JACIII Vol.18 No.4 pp. 558-566
doi: 10.20965/jaciii.2014.p0558
(2014)

Paper:

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

Saki Kawakubo*, Kiyoshi Izumi*,**, and Shinobu Yoshimura*

*School of Engineering, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-8654, Japan

**CREST, Japan Science and Technology Agency (JST), 5-3 Yonbanchou, Chiyoda-ku, Tokyo 102-8666, Japan

Received:
July 20, 2013
Accepted:
December 17, 2013
Published:
July 20, 2014
Creative Commons License
Keywords:
agent-based model, option markets, delta hedging, financial market simulation
Abstract
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.
Cite this article as:
S. Kawakubo, K. Izumi, and S. Yoshimura, “How Does High Frequency Risk Hedge Activity Have an Affect on Underlying Market?: Analysis by Artificial Market Model,” J. Adv. Comput. Intell. Intell. Inform., Vol.18 No.4, pp. 558-566, 2014.
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