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The order flow cost of index rolling in commodity futures markets

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  • Scott H. Irwin
  • Dwight R. Sanders
  • Lei Yan

Abstract

Commodity index rolling is treated as a natural experiment and an event study of order flow costs in a wide array of futures markets is conducted. The spread between nearby and deferred futures prices decreases significantly in the early and growth phases of financialization (1991–2011), with the spreads reversing back after rolling is completed. Spread impacts disappear in the post‐financialization period (2012–2019). We argue that a dramatic increase in the supply of liquidity brought on by the transition to electronic trading in commodity futures markets is primarily responsible for the decline of roll order flow costs.

Suggested Citation

  • Scott H. Irwin & Dwight R. Sanders & Lei Yan, 2023. "The order flow cost of index rolling in commodity futures markets," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 45(2), pages 1025-1050, June.
    • Handle: RePEc:wly:apecpp:v:45:y:2023:i:2:p:1025-1050
    DOI: 10.1002/aepp.13297
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    References listed on IDEAS

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    Cited by:

    1. Yan, Lei & Irwin, Scott H. & Sanders, Dwight R. & Smith, Aaron, 2024. "Was Allen Paul Right? Liquidation Bias in Commodity Futures Markets," 2024 Conference, April 22-23, 2024, St. Louis, Missouri 379013, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.

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