Using Multi-Agent Simulation to Understand Trading Dynamics of a Derivatives Market

King, Alan, Streltchenko, Olga and Yesha, Yelena, "Using Multi-Agent Simulation to Understand Trading Dynamics of a Derivatives Market" . Annals of Mathematics and Artificial Intelligence, Forthcoming

Abstract:

A fundamental question that arises in derivative pricing is why investors trade at a fair price. A common opinion attributes trading to differences in the beliefs that market participants have about the future development of market prices. We develop a model that accounts for investors' pre-existing liability structures and enables us to show, through a series of experiments, that investors trade even when their belief structures are identical and accurate.

More generally, we show that multi-agent simulation of a financial market provides a mechanism for conducting experiments that shed light on fundamental properties of the market. As all processes in financial markets (including decision making) become automated, it becomes crucial to have a mechanism by which we can observe the patterns that emerge from a variety of possible investor behaviors. Our simulator provides this mechanism.

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WebSphere refers to a brand of IBM software products, although the term also popularly refers to one specific product: WebSphere Application Server (WAS).

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