Heterogeneity,Bounded Rationality And Complex Dynamics In Futures Markets

There have been many empirical evidences for the complex dynamics in futures markets,such as the nonlinear relationship between futures price and spot price,the mispricing and the abnormal volatility of price.Previous studies have shown that heterogeneous investors play substantial impacts on price fluctuations.In this thesis,we attempt to develop the heterogeneous agents model for characterizing the dynamics of futures markets and offer some theoretical explanations for the complexities.The studies of behavioral finance have argued that investors in financial markets are boundedly rational.Their decision-making can be affected by cognitive limits and heuristic bias.These heuristic bias include representative bias,availability bias,conservative bias,anchoring effect,etc.Under these heuristic bias,investors are myopic and overconfident.They believe in the information they possess and switch the trading strategies with recent payoffs.These findings of behavioral finance underlie our research.In our model,there are two basic trading strategies,i.e.,the fundamental strategy and the technical strategy.For the fundamental strategy,traders expect that the price will move toward the fundamental value.When the price deviates greatly from the fundamental value,fundamentalists buy or sell the futures and push the price back toward the fundamental value.For the technical strategy,chartists believe that recent movements of price are persistent.If the price rises,they buy the futures,and vice versa.In chapter 2,we set up the benchmark model,where investors can switch between the fundamental strategy and the technical strategy,depicting the interactions of fundamentalists and chartists.More extensions are made based on this benchmark model.In chapter 3,we introduce the arbitrageurs who trade with the arbitrage basis price.In chapter 4,we study the basis arbitrage and more complex interactions between heterogeneous investors.In chapter 5,we develop the model under asymmetric information.In chapter 6,we integrate the benchmark model with complex networks.These extensions can characterize different situations of futures markets.The parameters of our model can measure the behavioral factors,such as the risk appetites,the degree of investor rationality,the disagreement of fundamental values,the herd behavior and the market liquidity.With mathematical analysis,we derive the equilibria of the models and their stability conditions,which are determined by the parameters.Only when the behavioral factors coordinate with each other,the stability conditions can be satisfied and the equilibria can be achieved.Furthermore,we analyze the impacts of these behavioral factors on market efficiency and market stability.In this study,we develop the pricing model for futures market and obtain some interesting results.The financial market provides a mechanism for aggregating diverse information.Our findings show that the futures price reflects both the fundamental information and the behavioral information.Due to investor heterogeneity and information asymmetry,the mispricing is almost inevitable,indicating that the price may always deviate from the fundamental value.This implies a new type of risk for traders,which can cause limits to arbitrage and lead to market inefficiency.This finding also suggests that the market is always wrong.We conjecture that this is an important endogenous drive for the continuous movements of price.It can explain why the price keeps fluctuating even if the exogenous factors are unchanged.Besides,our study shows that the market tends to aggregate the information from the group which has high risk appetites and low degree of rationality.It implies that the increase of sophisticated investors is not necessarily beneficial to market efficiency.Under the asymmetric information structure,heterogeneous investors possess private information of fundamentals.They estimate the fundamental value based on their private information and have disagreement about the fundamental value.Our results show that the disagreement is an important source of mispricing.It can affect both the equilibrium and its stability conditions.The high disagreement can cause the violation of stability conditions and lead to the complex dynamics of price.We investigate the role of arbitrageurs in the futures market.Unlike the traditional argument,we find that the arbitrage behaviors can destabilize the market.When arbitrageurs trade based on the arbitrage basis price,the futures is likely to be mispriced.Especially,if the arbitrageurs have high risk appetites,the stability conditions of equilibrium can be violated.Therefore,the arbitrage does not always facilitate the price discovery in futures markets,although it can push the convergence between futures price and spot price in some cases.Investor rationality is usually required for market efficiency in traditional literatures.However,we find that if the degree of investor rationality is too high,the stability conditions may be unsatisfied.When investors are highly rational,they switch the trading strategies rapidly with the payoffs.This can cause great impulse on the price and increase price volatility.If the degree of investor rationality is too low,the market may also be unstable.Our findings show that only proper degree of rationality is beneficial to market stability.The degree of investor rationality should match with other market parameters,such as market liquidity and the risk appetites of investors.As our study shows,market liquidity is an important factor that affects market stability.When the market is lack of liquidity,the stability conditions are hard to be satisfied.Then,the price is likely to fluctuate greatly and can not converge to the equilibrium.We find that adequate liquidity is an important condition for market stability.This is consistent with the results of previous studies.When investors have high risk appetites,they buy or sell the futures with large amounts and can cause great fluctuations of price.In this situation,the market is likely to be unstable.As our results indicate,the stability conditions are violated if investors have high risk appetites.In addition,the price tends to reflect the information of the group with high risk appetites.With the complex networks,we examine the impacts of herd behavior on market stability.It is found that herd behavior is not necessarily harmful for market stability.Proper degree of herd behavior can promote market stability.However,if speculative trading dominates in the market,herd behavior can lead to the bubble.For the system derived from our model,it is difficult to make an analysis of the global stability.We turn to numerical simulations with bifurcation diagrams and phase portraits.They exhibit the complex dynamics when the stability conditions are violated,providing some insights into the occurrence of chaos in the market.This study provides some implications for market regulation.To facilitate the price discovery and enhance market stability,appropriate policy interventions can be implemented in aspects of curbing speculations,soothing market sentiment and increasing market liquidity.Besides,this study offers a reference for the pricing model of futures market.In our work,the model is not calibrated with the empirical data.We hope to explore more empirical research in the future.