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Measuring the cost of liquidity in agricultural futures markets: Conventional and Bayesian approaches

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  • Julieta Frank
  • Philip Garcia

Abstract

Estimation of liquidity costs in futures markets is challenging because bid-ask spreads are usually not observed. Several estimators of liquidity costs exist that use transaction data, but there is little agreement on their relative accuracy and usefulness, and their performance has been questioned. We use a Bayesian method proposed by Hasbrouck which possesses conceptually desirable properties to estimate liquidity costs of six agricultural future contracts. The method builds on Roll’'s model and uses Markov Chain Monte Carlo estimation. Our Bayesian estimates are lower than more traditional estimates and as anticipated decrease even more when more realistic assumptions such as discreteness are incorporated. The findings demonstrate the need for further research to clarify the usefulness and accuracy of the procedure.

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File URL: http://hdl.handle.net/10.1111/j.1574-0862.2011.00557.x
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Bibliographic Info

Article provided by International Association of Agricultural Economists in its journal Agricultural Economics.

Volume (Year): 42 (2011)
Issue (Month): (November)
Pages: 131-140

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Handle: RePEc:bla:agecon:v:42:y:2011:i::p:131-140

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  1. Choi, J. Y. & Salandro, Dan & Shastri, Kuldeep, 1988. "On the Estimation of Bid-Ask Spreads: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 23(02), pages 219-230, June.
  2. Thompson, Sarahelen R. & Waller, Mark L., 1987. "The Execution Cost of Trading in Commodity Futures Markets," Food Research Institute Studies, Stanford University, Food Research Institute, Stanford University, Food Research Institute, issue 02.
  3. Thompson, S. & Waller, M.L., 1988. "Determinants Of Liquidity Costs In Commodity Furures Markets," Papers, Columbia - Center for Futures Markets 172, Columbia - Center for Futures Markets.
  4. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 733-46, June.
  5. Thompson, Sarahelen R. & Eales, James S. & Seibold, David, 1993. "Comparison Of Liquidity Costs Between The Kansas City And Chicago Wheat Futures Contracts," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, Western Agricultural Economics Association, vol. 18(02), December.
  6. Ferguson, Michael F & Mann, Steven C, 2001. "Execution Costs and Their Intraday Variation in Futures Markets," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 74(1), pages 125-60, January.
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Cited by:
  1. Frank, Julieta & Garcia, Philip, 2008. "Market Depth in Lean Hog and Live Cattle Futures Markets," 2008 Conference, April 21-22, 2008, St. Louis, Missouri, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management 37613, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.

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