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Activity Number:
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451
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Type:
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Contributed
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Date/Time:
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Wednesday, August 6, 2008 : 2:00 PM to 3:50 PM
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Sponsor:
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Business and Economics Statistics Section
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| Abstract - #302674 |
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Title:
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Market Depth in Agricultural Futures Markets
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Author(s):
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Julieta Frank*+ and Philip Garcia
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Companies:
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University of Illinois at Urbana-Champaign and University of Illinois at Urbana-Champaign
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Address:
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, , ,
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Keywords:
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Bayesian MCMC ; futures markets ; liquidity cost ; market depth ; market microstructure
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Abstract:
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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 bid-ask 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 both commodities the cumulative effect of volume on price change may lead to liquidity costs higher than a tick.
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