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Bid-ask spreads in commodity futures markets

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Author Info
Henry L. Bryant
Michael S. Haigh
Abstract

Issues of recent interest and controversy regarding bid-ask spreads in commodity futures markets are investigated. First, competing spread estimators are applied to open outcry transactions data and resulting estimates are compared to observed spreads. This enables market microstructure researchers, regulators, exchange officials, and traders the opportunity to evaluate the usefulness and accuracy of bid-ask estimators in markets that do not report bid and ask data, providing an idea of the 'worst-case' transaction costs that are likely to be incurred. Also compared, are spreads observed before and after trading was automated (and made anonymous) on commodity futures markets, and it is discovered that spreads have generally widened since trading was automated, and that they have an increased tendency to widen in periods of high volatility. These findings suggest that commodity futures markets have an inherently different character than financial futures markets, and therefore merit separate investigation.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 14 (2004)
Issue (Month): 13 (September)
Pages: 923-936
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Handle: RePEc:taf:apfiec:v:14:y:2004:i:13:p:923-936

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Frino, Alex & McInish, Thomas H. & Toner, Martin, 1998. "The liquidity of automated exchanges: new evidence from German Bund futures," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(3-4), pages 225-241, December. [Downloadable!] (restricted)
  2. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May. [Downloadable!] (restricted)
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  3. McInish, Thomas H & Wood, Robert A, 1992. " An Analysis of Intraday Patterns in Bid/Ask Spreads for NYSE Stocks," Journal of Finance, American Finance Association, vol. 47(2), pages 753-64, June. [Downloadable!] (restricted)
  4. Thompson, Sarahelen & 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, vol. 18(02), December. [Downloadable!]
  5. Copeland, Thomas E & Galai, Dan, 1983. " Information Effects on the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 38(5), pages 1457-69, December. [Downloadable!] (restricted)
  6. ap Gwilym, Owain & Thomas, Stephen, 2002. "An empirical comparison of quoted and implied bid-ask spreads on futures contracts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(1), pages 81-99, February. [Downloadable!] (restricted)
  7. Foster, F. Douglas & Viswanathan, S., 1994. "Strategic Trading with Asymmetrically Informed Traders and Long-Lived Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(04), pages 499-518, December. [Downloadable!]
  8. Granger, C W J & Newbold, P, 1973. "Some Comments on the Evaluation of Economic Forecasts," Applied Economics, Taylor and Francis Journals, vol. 5(1), pages 35-47, March.
  9. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June. [Downloadable!] (restricted)
  10. Ashley, R & Granger, C W J & Schmalensee, R, 1980. "Advertising and Aggregate Consumption: An Analysis of Causality," Econometrica, Econometric Society, vol. 48(5), pages 1149-67, July. [Downloadable!] (restricted)
  11. Petersen, Mitchell A. & Fialkowski, David, 1994. "Posted versus effective spreads *1: Good prices or bad quotes?," Journal of Financial Economics, Elsevier, vol. 35(3), pages 269-292, June. [Downloadable!] (restricted)
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  1. Frank, Julieta & Garcia, Philip, 2009. "Bid-Ask Spreads, Volume, and Volatility: Evidence from Livestock Markets," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49575, Agricultural and Applied Economics Association. [Downloadable!]
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