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Market Depth in Lean Hog and Live Cattle Futures Markets

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  • Frank, Julieta
  • Garcia, Philip

Abstract

Liquidity costs in futures markets are not observed directly because bids and offers occur in an open outcry pit and are not recorded. Traditional estimation of these costs has focused on bidask spreads using transaction prices. However, the bid-ask spread only captures the tightness of the market price. As the volume increases measures of market depth which identify how the order flow moves prices become important information. We estimate market depth for lean hogs and live cattle markets using a Bayesian MCMC method to estimate unobserved data. While the markets are highly liquid, our results show that cost- and risk-reducing strategies may exist. Liquidity costs are highest when larger volumes are traded at distant contracts. For hogs the market becomes less liquid prior to the expiration month. For cattle this occurs during the expiration month when the liquidity risk is also higher. For both markets this coincides with periods of low volume. For the nearby contract highest trading volume occurs at the beginning of the month prior to expiration and lowest trading volume occurs in the expiration month. For both commodities the cumulative effect of volume on price change may lead to liquidity costs higher than a tick.

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Bibliographic Info

Paper provided by NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2008 Conference, April 21-22, 2008, St. Louis, Missouri with number 37613.

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Date of creation: 2008
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Handle: RePEc:ags:nccest:37613

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Related research

Keywords: Bayesian MCMC; lean hog futures; liquidity cost; live cattle futures; market depth; market microstructure; Agricultural Finance;

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References

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  1. Julieta Frank & Philip Garcia, 2011. "Measuring the cost of liquidity in agricultural futures markets: Conventional and Bayesian approaches," Agricultural Economics, International Association of Agricultural Economists, vol. 42, pages 131-140, November.
  2. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  3. Joost M. E. Pennings & W. Erno Kuiper & Frenkel ter Hofstede & Matthew T. G. Meulenberg, 1998. "The price path due to order imbalances: evidence from the Amsterdam Agricultural Futures Exchange," European Financial Management, European Financial Management Association, vol. 4(1), pages 47-64.
  4. Bessembinder, Hendrik & Seguin, Paul J., 1993. "Price Volatility, Trading Volume, and Market Depth: Evidence from Futures Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 21-39, March.
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Cited by:
  1. Martinez, Valeria & Gupta, Paramita & Tse, Yiuman & Kittiakarasakun, Jullavut, 2011. "Electronic versus open outcry trading in agricultural commodities futures markets," Review of Financial Economics, Elsevier, vol. 20(1), pages 28-36, January.

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