IDEAS home Printed from https://ideas.repec.org/a/wly/jfutmk/v43y2023i6p792-806.html
   My bibliography  Save this article

A tale of two contracts: Examining the behavior of bid–ask spreads of corn futures in China

Author

Listed:
  • Miao Li
  • Tao Xiong
  • Ziran Li

Abstract

Contracts that expire in January, May, and September attract the most trading activity for corn futures in China. Contracts that mature in other months are thinly traded, even when they are the closest to maturity. In this paper, we examine and compare the behavior and determinants of the bid–ask spreads (BASs) of active and inactive contracts using the best bid offer data set. We show that both the magnitude and volatility of BAS for inactive contracts exhibit U‐shaped patterns, whereas active contracts' BAS increase only near their expiration. Inactive contracts are also of low liquidity risk after introducing market makers. On the basis of the simultaneous equation model, we find that BAS responds negatively to volume and positively to volatility and order imbalance. The impacts are larger in inactive contracts. Moreover, introducing market makers to inactive contracts is conducive to attracting trading and lowering trading costs.

Suggested Citation

  • 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.
    • Handle: RePEc:wly:jfutmk:v:43:y:2023:i:6:p:792-806
    DOI: 10.1002/fut.22411
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/fut.22411
    Download Restriction: no
    File URL: https://libkey.io/10.1002/fut.22411?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
    ---><---

    References listed on IDEAS

    as
    1. Qingfu Liu & Qian Luo & Yiuman Tse & Yuchi Xie, 2020. "The market quality of commodity futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(11), pages 1751-1766, November.
    2. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2005. "Limit Order Book as a Market for Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1171-1217.
    3. Joshua D. Angrist & Alan B. Krueger, 2001. "Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments," Working Papers 834, Princeton University, Department of Economics, Industrial Relations Section..
    4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    5. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    6. Valeria Martinez & Paramita Gupta & Yiuman Tse & Jullavut Kittiakarasakun, 2011. "Electronic versus open outcry trading in agricultural commodities futures markets," Review of Financial Economics, John Wiley & Sons, vol. 20(1), pages 28-36, January.
    7. Bruno Biais & David Martimort & Jean-Charles Rochet, 2000. "Competing Mechanisms in a Common Value Environment," Econometrica, Econometric Society, vol. 68(4), pages 799-838, July.
    8. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2007. "Enhanced routines for instrumental variables/generalized method of moments estimation and testing," Stata Journal, StataCorp LLC, vol. 7(4), pages 465-506, December.
    9. Peterson, Hikaru Hanawa & Tomek, William G., 2007. "Grain Marketing Strategies Within and Across Lifetimes," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 32(01), pages 1-20, April.
    10. 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.
    11. Steffen Volkenand & Guenther Filler & Martin Odening, 2018. "The impact of order imbalance on returns, liquidity, and volatility in agricultural commodity markets," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 78(5), pages 571-591, July.
    12. 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.
    13. Quanbiao Shang & Mindy Mallory & Philip Garcia, 2018. "The components of the bid†ask spread: Evidence from the corn futures market," Agricultural Economics, International Association of Agricultural Economists, vol. 49(3), pages 381-393, May.
    14. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    15. Qingfu Liu & Yiuman Tse & Kaixin Zheng, 2021. "The impact of trading behavioral biases on market liquidity under different volatility levels: Evidence from the Chinese commodity futures market," The Financial Review, Eastern Finance Association, vol. 56(4), pages 671-692, November.
    16. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    17. Blume, Lawrence & Easley, David & O'Hara, Maureen, 1994. "Market Statistics and Technical Analysis: The Role of Volume," Journal of Finance, American Finance Association, vol. 49(1), pages 153-181, March.
    18. 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.
    19. Michael P. Murray, 2006. "Avoiding Invalid Instruments and Coping with Weak Instruments," Journal of Economic Perspectives, American Economic Association, vol. 20(4), pages 111-132, Fall.
    20. Thompson, S. & Waller, M.L., 1988. "Determinants Of Liquidity Costs In Commodity Furures Markets," Papers 172, Columbia - Center for Futures Markets.
    21. 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.
    22. 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.
    23. Yongmin Zhang & Shusheng Ding, 2018. "Return and volatility co-movement in commodity futures markets: the effects of liquidity risk," Quantitative Finance, Taylor & Francis Journals, vol. 18(9), pages 1471-1486, September.
    24. Yuanyuan Xu & Chongguang Li, 2018. "Liquidity of the Chinese Agricultural Futures Market and Its Impact on Futures Price—Based on High-Frequency Data," Sustainability, MDPI, vol. 10(12), pages 1-18, December.
    25. Eldor, Rafi & Hauser, Shmuel & Pilo, Batia & Shurki, Itzik, 2006. "The contribution of market makers to liquidity and efficiency of options trading in electronic markets," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 2025-2040, July.
    26. Terrence F. Martell & Ruben C. Trevino, 1990. "The intraday behavior of commodity futures prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 10(6), pages 661-671, December.
    27. repec:fth:prinin:455 is not listed on IDEAS
    28. Joshua D. Angrist & Alan B. Krueger, 2001. "Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 69-85, Fall.
    29. Costa, Geraldo Jr. & Trujillo-Barrera, Andres & Pennings, Joost M.E., 2018. "Concentration and Liquidity Costs in Emerging Commodity Exchanges," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 43(3), September.
    30. 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.
    31. Shah, Samarth & Brorsen, B. Wade & Anderson, Kim B., 2012. "Effective Bid-Ask Spreads in Futures versus Futures Options," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(3), pages 1-14.
    32. Joshua Angrist & Alan Krueger, 2001. "Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments," Working Papers 834, Princeton University, Department of Economics, Industrial Relations Section..
    33. Shah, Samarth & Brorsen, B. Wade, 2011. "Electronic vs. Open Outcry: Side-by-Side Trading of KCBT Wheat Futures," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 36(01), pages 1-15, April.
    Full references (including those not matched with items on IDEAS)

    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. 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.
    2. Li, Miao & Xiong, Tao, 2023. "Is China's new live hog futures market efficient? Evidence from an analysis of market quality, price discovery and hedging effectiveness," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 68(01), September.
    3. Guilhem Bascle, 2008. "Controlling for endogeneity with instrumental variables in strategic management research," Post-Print hal-00576795, HAL.
    4. Jagjeev Dosanjh, 2017. "Exchange Initiatives and Market Efficiency: Evidence from the Australian Securities Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2017, January-A.
    5. repec:uts:finphd:34 is not listed on IDEAS
    6. Michael T. French & Ioana Popovici, 2011. "That instrument is lousy! In search of agreement when using instrumental variables estimation in substance use research," Health Economics, John Wiley & Sons, Ltd., vol. 20(2), pages 127-146, February.
    7. Cameron McIntosh, 2014. "The presence of an error term does not preclude causal inference in regression: a comment on Krause (2012)," Quality & Quantity: International Journal of Methodology, Springer, vol. 48(1), pages 243-250, January.
    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. 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.
    10. Harry Patrinos & Chris Sakellariou, 2005. "Schooling and Labor Market Impacts of a Natural Policy Experiment," LABOUR, CEIS, vol. 19(4), pages 705-719, December.
    11. Eva Spring & Volker Grossmann, 2016. "Does bilateral trust across countries really affect international trade and factor mobility?," Empirical Economics, Springer, vol. 50(1), pages 103-136, February.
    12. 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.
    13. Chris Sakellariou, 2006. "Education policy reform, local average treatment effect and returns to schooling from instrumental variables in the Philippines," Applied Economics, Taylor & Francis Journals, vol. 38(4), pages 473-481.
    14. Asadul Islam & Dietrich K. Fausten, 2008. "Skilled Immigration and Wages in Australia," The Economic Record, The Economic Society of Australia, vol. 84(s1), pages 66-82, September.
    15. Anderson, Brian S, 2018. "Endogeneity and Entrepreneurship Research," OSF Preprints 75tn8, Center for Open Science.
    16. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 4, July-Dece.
    17. Jon P. Nelson, 2010. "What is Learned from Longitudinal Studies of Advertising and Youth Drinking and Smoking? A Critical Assessment," IJERPH, MDPI, vol. 7(3), pages 1-57, March.
    18. repec:osf:osfxxx:75tn8_v1 is not listed on IDEAS
    19. Alex Frino & Elvis Jarnecic & Hui Zheng, 2010. "Activity in futures: does underlying market size relate to futures trading volume?," Review of Quantitative Finance and Accounting, Springer, vol. 34(3), pages 313-325, April.
    20. Florian Flachenecker, 2018. "The causal impact of material productivity on macroeconomic competitiveness in the European Union," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 20(1), pages 17-46, January.
    21. Krishna Chaitanya Vadlamannati, 2012. "Impact of Political Risk on FDI Revisited—An Aggregate Firm-Level Analysis," International Interactions, Taylor & Francis Journals, vol. 38(1), pages 111-139, January.
    22. Karthik Balakrishnan & Mary Brooke Billings & Bryan Kelly & Alexander Ljungqvist, 2014. "Shaping Liquidity: On the Causal Effects of Voluntary Disclosure," Journal of Finance, American Finance Association, vol. 69(5), pages 2237-2278, October.

    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:wly:jfutmk:v:43:y:2023:i:6:p:792-806. 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: http://www.interscience.wiley.com/jpages/0270-7314/ .

    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.