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Impacts of investor heterogeneity and interactions on price discovery in futures markets: Based on dynamical system and stability analysis

Author

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  • Qingbin Gong

    (Shanghai Jiao Tong University)

  • Zhe Yang

    (Shanghai University of Finance and Economics)

  • Xundi Diao

    (Shanghai Jiao Tong University)

Abstract

This paper investigates the impacts of trading behaviors on price discovery in futures markets. A dynamical model with difference equations is proposed to depict the interactions of heterogenous investors and the spot-futures coevolution. The system equilibrium and its stability conditions are mathematically analyzed. In the equilibrium, the futures price and the spot price converge to the fundamental value simultaneously. Stability conditions are necessary for the convergence process as well as the price discovery function. To ensure stability conditions, factors such as investor bounded rationality, risk appetites and market liquidity need to satisfy specific relationships. As the findings show, the arbitrage is not always beneficial to market stability and price discovery. It may increase price fluctuations in some cases. If investors have high degree of rationality, they tend to switch trading strategies with high intensity, which may destabilize the market. The simulations suggest the occurrence of complicated dynamics when stability conditions are violated. It provides theoretical insights into complicated phenomena in futures markets.

Suggested Citation

  • Qingbin Gong & Zhe Yang & Xundi Diao, 2025. "Impacts of investor heterogeneity and interactions on price discovery in futures markets: Based on dynamical system and stability analysis," Annals of Operations Research, Springer, vol. 350(3), pages 957-977, July.
    • Handle: RePEc:spr:annopr:v:350:y:2025:i:3:d:10.1007_s10479-025-06676-8
    DOI: 10.1007/s10479-025-06676-8
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