Market Depth in Lean Hog and Live Cattle Futures Markets
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.
|Date of creation:||2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (217) 333-1810
Fax: (217) 333-5538
Web page: http://www.farmdoc.uiuc.edu/nccc134/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- B. Wade Brorsen, 1989. "Liquidity costs and scalping returns in the corn futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 9(3), pages 225-236, 06.
- Julieta Frank & Philip Garcia, 2011.
"Measuring the cost of liquidity in agricultural futures markets: Conventional and Bayesian approaches,"
International Association of Agricultural Economists, vol. 42, pages 131-140, November.
- Frank, Julieta & Garcia, Philip, 2007. "Measuring Liquidity Costs in Agricultural Futures Markets," 2007 Conference, April 16-17, 2007, Chicago, Illinois 37572, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
- Frank, Julieta & Garcia, Philip, 2006. "Estimating Liquidity Costs in Agricultural Futures Markets using Bayesian Methods," 2006 Annual meeting, July 23-26, Long Beach, CA 21331, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
- 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.
- Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
- 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.
When requesting a correction, please mention this item's handle: RePEc:ags:nccest:37613. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If references are entirely missing, you can add them using this form.