IDEAS home Printed from https://ideas.repec.org/a/bla/agecon/v42y2011ip131-140.html
   My bibliography  Save this article

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

Author

Listed:
  • 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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • 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.
    • Handle: RePEc:bla:agecon:v:42:y:2011:i::p:131-140
    DOI: j.1574-0862.2011.00557.x
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/j.1574-0862.2011.00557.x
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/j.1574-0862.2011.00557.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    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, vol. 23(2), pages 219-230, June.
    2. Lee, Charles M C & Ready, Mark J, 1991. "Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    3. 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, vol. 20(2), pages 1-24.
    4. Thompson, S. & Waller, M.L., 1988. "Determinants Of Liquidity Costs In Commodity Furures Markets," Papers 172, Columbia - Center for Futures Markets.
    5. George H. K. Wang & Jot Yau & Tony Baptiste, 1997. "Trading volume and transaction costs in futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 17(7), pages 757-780, October.
    6. Anand, Amber & Karagozoglu, Ahmet K., 2006. "Relative performance of bid-ask spread estimators: Futures market evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(3), pages 231-245, July.
    7. Hasbrouck, Joel, 2004. "Liquidity in the Futures Pits: Inferring Market Dynamics from Incomplete Data," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(2), pages 305-326, June.
    8. Henry Bryant & Michael Haigh, 2004. "Bid-ask spreads in commodity futures markets," Applied Financial Economics, Taylor & Francis Journals, vol. 14(13), pages 923-936.
    9. B. Wade Brorsen & Darren W. Buck & Stephen R. Koontz, 1998. "Hedging hard red winter wheat: Kansas City versus Chicago," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 18(4), pages 449-466, June.
    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(2), pages 1-13, December.
    11. Ferguson, Michael F & Mann, Steven C, 2001. "Execution Costs and Their Intraday Variation in Futures Markets," The Journal of Business, University of Chicago Press, vol. 74(1), pages 125-160, January.
    12. Roll, Richard, 1984. "A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market," Journal of Finance, American Finance Association, vol. 39(4), pages 1127-1139, September.
    13. Phillips, Susan M. & Smith, Clifford Jr., 1980. "Trading costs for listed options : The implications for market efficiency," Journal of Financial Economics, Elsevier, vol. 8(2), pages 179-201, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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 37613, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Julieta Frank & Philip Garcia, 2010. "Bid-Ask Spreads, Volume, and Volatility: Evidence from Livestock Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(1), pages 209-225.
    2. Park, Cheol-Ho & Irwin, Scott H., 2004. "The Profitability Of Technical Trading Rules In Us Futures Markets: A Data Snooping Free Test," 2004 Conference, April 19-20, 2004, St. Louis, Missouri 19011, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    3. Miao Li & Tao Xiong & Ziran Li, 2023. "A tale of two contracts: Examining the behavior of bid–ask spreads of corn futures in China," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(6), pages 792-806, June.
    4. Samarth Shah & B. Wade Brorsen, 2013. "Are liquidity costs higher in options markets or in futures markets?," Applied Financial Economics, Taylor & Francis Journals, vol. 23(8), pages 701-708, April.
    5. Xiaoyang Wang & Philip Garcia & Scott H. Irwin, 2014. "The Behavior of Bid-Ask Spreads in the Electronically-Traded Corn Futures Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 96(2), pages 557-577.
    6. Henry Bryant & Michael Haigh, 2004. "Bid-ask spreads in commodity futures markets," Applied Financial Economics, Taylor & Francis Journals, vol. 14(13), pages 923-936.
    7. Bryant, Henry L. & Haigh, Michael S., 2002. "Bid-Ask Spreads In Commodity Futures Markets," Working Papers 28587, University of Maryland, Department of Agricultural and Resource Economics.
    8. Cenesizoglu, Tolga & Grass, Gunnar, 2018. "Bid- and ask-side liquidity in the NYSE limit order book," Journal of Financial Markets, Elsevier, vol. 38(C), pages 14-38.
    9. Pennings, Joost M.E. & Garcia, Philip & Marsh, Julia W., 2003. "Futures Market Depth: Revealed Vs. Perceived Price Order Imbalances," 2003 Conference, April 21-22, 2003, St. Louis, Missouri 18989, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    10. Mario Anolli & Giovanni Petrella, 2008. "Qualità della negoziazione e tutela dell'investitore," Rivista di Politica Economica, SIPI Spa, vol. 98(1), pages 295-353, January-F.
    11. Craig W. Holden & Stacey Jacobsen & Avanidhar Subrahmanyam, 2014. "The Empirical Analysis of Liquidity," Foundations and Trends(R) in Finance, now publishers, vol. 8(4), pages 263-365, December.
    12. Nicola Secomandi & Sunder Kekre, 2014. "Optimal Energy Procurement in Spot and Forward Markets," Manufacturing & Service Operations Management, INFORMS, vol. 16(2), pages 270-282, May.
    13. Francis Breedon & Allison Holland, 1998. "Electronic versus open outcry markets: The case of the Bund futures contract," Bank of England working papers 76, Bank of England.
    14. George Tannous & Juan Wang & Craig Wilson, 2013. "The Intraday Pattern of Information Asymmetry, Spread, and Depth: Evidence from the NYSE," International Review of Finance, International Review of Finance Ltd., vol. 13(2), pages 215-240, June.
    15. Lesmond, David A. & Schill, Michael J. & Zhou, Chunsheng, 2004. "The illusory nature of momentum profits," Journal of Financial Economics, Elsevier, vol. 71(2), pages 349-380, February.
    16. Zeynep Cobandag Guloglu & Cumhur Ekinci, 2022. "Liquidity measurement: A comparative review of the literature with a focus on high frequency," Journal of Economic Surveys, Wiley Blackwell, vol. 36(1), pages 41-74, February.
    17. Bryant, Henry L. & Haigh, Michael S., 2001. "Estimating Actual Bid-Ask Spreads In Commodity Futures Markets," 2001 Annual meeting, August 5-8, Chicago, IL 20707, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    18. Marshall, Ben R. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat, 2018. "Do liquidity proxies measure liquidity accurately in ETFs?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 55(C), pages 94-111.
    19. Gao, Yang & Li, Yunhai & Wang, Yaojun & Wang, Chao & Liu, Chao, 2019. "Asymptotic comparison of three spread estimators based on Roll’s model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 525(C), pages 420-432.
    20. Michael Bleaney & Zhiyong Li, 2016. "A new spread estimator," Review of Quantitative Finance and Accounting, Springer, vol. 47(1), pages 179-211, July.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:agecon:v:42:y:2011:i::p:131-140. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/iaaeeea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.