We theoretically analyze influence of the crosstalk, insertion loss, and bandwidth of the arrayed waveguide grating on the dynamic range, wavelength resolution, and demodulation accuracy of the demodulation system. The results show that the larger the bandwidth, the larger is the dynamic range of the demodulation system; however, the wavelength resolution will decrease. It also shows that the smaller the crosstalk, the higher is the demodulation accuracy. Then, we theoretically investigate the factors affecting the output spectral bandwidth of the arrayed waveguide grating, such as the number of diffraction orders of the arrayed waveguide grating, the number of arrayed waveguides, and the width of the horn. The results show that the passband bandwidth of the arrayed waveguide grating is larger when the number of waveguides is smaller and the width of the tapered waveguide opening is larger. Finally, we design an arrayed waveguide grating based on a 2% refractive index difference silica material system, which has the characteristics of wide bandwidth, low loss, and low crosstalk. It provides theoretical guidance for research on fiber-grafting demodulation systems based on arrayed waveguide grating. We then specify the optimization direction of the device and system.