Program Trading And Its Risk Analysis Based On Agent-based Computational Finance

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. In the past, scholars adopted traditional financial methodology to research program trading risk. Based on logic inference, the statement that combination insurance strategy will form a link-like collapse under pessimistic market situation was accepted by many professional persons. However, it was hard to describe a fact because a scenario won't happen again. In normal, to research the relationship between stock index futures market and the price fluctuation in the real market, the traditional method is to compare with price fluctuations without the influence of stock index futures and that with the influence of stock index futures in the real market; to research the relationship between program trading and the price fluctuation of stock market, the method is to adopt independent variable—funding ratio of program trading strategy and dependent variable—price fluctuation. Indeed, these methods can get persuasive results. But they are limited by numbers of samples and they cannot avoid other factors. Thereby, under conditions of different market and different period, it will be possible to get opposite results and whether stock index futures market will stabilize price fluctuation of spot market or bring downside risk of spot market is still a dispute. To solve this complex problem, a good methodology is Agent-based Computational Finance.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.