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Bid-Ask Spreads, Volume, and Volatility: Evidence from Livestock Markets

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  • Frank, Julieta
  • Garcia, Philip

Abstract

Understanding the determinants of liquidity costs in agricultural futures markets is hampered by a need to use proxies for the bid-ask spread which are often biased, and by a failure to account for a jointly determined micro-market structure. We estimate liquidity costs and its determinants for the live cattle and hog futures markets using alternative liquidity cost estimators, intraday prices and micro-market information. Volume and volatility are simultaneously determined and significantly related to the bid-ask spread. Daily volume is negatively related to the spread while volatility and volume per transaction display positive relationships. Electronic trading has a significant competitive effect on liquidity costs, particularly in the live cattle market. Results are sensitive to the bid-ask spread measure, with a modified Bayesian method providing estimates most consistent with expectations and the competitive structure found in these markets.

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Bibliographic Info

Paper provided by Agricultural and Applied Economics Association in its series 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin with number 49575.

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Date of creation: 2009
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Handle: RePEc:ags:aaea09:49575

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Keywords: Bayesian estimation; bid-ask spread determinants; liquidity cost; Livestock Production/Industries; Marketing;

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  1. Robert E. Cumby & John Huizinga, 1990. "Testing The Autocorrelation Structure of Disturbances in Ordinary Least Squares and Instrumental Variables Regressions," NBER Technical Working Papers 0092, National Bureau of Economic Research, Inc.
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  4. Dwight R. Sanders & Scott H. Irwin & Robert P. Merrin, 2010. "The Adequacy of Speculation in Agricultural Futures Markets: Too Much of a Good Thing?," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 32(1), pages 77-94.
  5. Henry Bryant & Michael Haigh, 2004. "Bid-ask spreads in commodity futures markets," Applied Financial Economics, Taylor & Francis Journals, vol. 14(13), pages 923-936.
  6. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. 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, issue 02.
  8. Thompson, S. & Waller, M.L., 1988. "Determinants Of Liquidity Costs In Commodity Furures Markets," Papers 172, Columbia - Center for Futures Markets.
  9. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  10. 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, vol. 18(02), December.
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Cited by:
  1. Janzen, Joseph P. & Smith, Aaron D. & Carter, Colin A., 2012. "The Quality of Price Discovery and the Transition to Electronic Trade: The Case of Cotton Futures," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 125024, Agricultural and Applied Economics Association.
  2. Irwin, Scott H. & Sanders, Dwight R., 2012. "Financialization and Structural Change in Commodity Futures Markets," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 44(03), August.

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