ANALYSIS OF STOCK-MARKET VOLATILITY USING A STOCHASTIC INVESTOR MODEL

This paper describes an analysis of stock market volatility under heterogeneous expectation using a computer simulation. The simulation model involves a stock market, a stock index futures market, and various types of investors. Investors place orders based on their own expectations, which follow a stochastic process, and the prices of the securities are determined by a precise method used in the Tokyo Stock Exchange. An analysis of the simulations shows that, 1) arbitrage activity increases the volatility of the stock and futures markets and, 2) the dynamic hedge strategy, which is frequently used by program trading, has little influence on the price of securities.