Simulating Perpetual Futures Premiums with Heterogeneous Order Book Traders
Summary
This paper adapts an agent-based limit order book model to study perpetual futures, where long and short traders can follow positional or basis-trading behaviors. The simulated market includes a central limit order book and extends a model originally designed for a simpler stock exchange. Rather than attempting to recreate broad return patterns, the study focuses on how market and agent settings affect the premium of the perpetual contract relative to spot.
The model reproduces the central feature of perpetual futures: the contract price remains linked to the underlying spot price. It explores how order lifetime, trading horizon, and spread shape that premium, and examines whether assigning positional behavior more often to longs and basis trading more often to shorts produces patterns consistent with the intended market design and observed tendencies. The author presents the simulation as a tool for investigating perpetual futures microstructure. Its conclusions are limited by the simplicity of the modeled agent behavior and by the choices of parameters and market structure.
Key ideas
- The paper adapts a heterogeneous-agent limit order book model to perpetual futures.
- Agents can trade positionally or seek to trade the basis between the contract and spot.
- The model reproduces the contract’s price linkage to the underlying spot market.
- Order lifetime, trading horizon, and spread are examined as drivers of the perpetual futures premium.
- The simulation’s usefulness depends on its simplified behavior and chosen market parameters.
Tags
Full text
# Agent-Based Simulation of a Perpetual Futures Market # Agent-Based Simulation of a Perpetual Futures Market I introduce an agent-based model of a Perpetual Futures market with heterogeneous agents trading via a central limit order book. Perpetual Futures (henceforth Perps) are financial derivatives introduced by the economist Robert Shiller, designed to peg their price to that of the underlying Spot market. This paper extends the limit order book model of Chiarella et al. (2002) by taking their agent and orderbook parameters, designed for a simple stock exchange, and applying it to the more complex environment of a Perp market with long and short traders who exhibit both positional and basis-trading behaviors. I find that despite the simplicity of the agent behavior, the simulation is able to reproduce the most salient feature of a Perp market, the pegging of the Perp price to the underlying Spot price. In contrast to fundamental simulations of stock markets which aim to reproduce empirically observed stylized facts such as the leptokurtosis and heteroscedasticity of returns, volatility clustering and others, in derivatives markets many of these features are provided exogenously by the underlying Spot price signal. This is especially true of Perps since the derivative is designed to mimic the price of the Spot market. Therefore, this paper will focus exclusively on analyzing how market and agent parameters such as order lifetime, trading horizon and spread affect the premiums at which Perps trade with respect to the underlying Spot market. I show that this simulation provides a simple and robust environment for exploring the dynamics of Perpetual Futures markets and their microstructure in this regard. Lastly, I explore the ability of the model to reproduce the effects of biasing long traders to trade positionally and short traders to basis-trade, which was the original intention behind the market design, and is a tendency observed empirically in real Perp markets.
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