Slopes, Spreads, and Depth: Monetary Policy Announcements and Liquidity Provision in the Energy Futures Market

29 Pages Posted: 1 Nov 2016

See all articles by Lee A. Smales

Lee A. Smales

University of Western Australia

Date Written: October 31, 2016

Abstract

Crude oil futures play an important role in the global financial and energy markets, yet the dynamics of liquidity in this crucial market have largely been ignored. Understanding how macroeconomic events shape liquidity in this market is crucial for both hedgers and speculators, particularly those demanding large amounts of liquidity. In addition, policy makers are able to assess the efficacy of the policy transmission mechanism. Using high-frequency data, we consider three elements of market liquidity to achieve a detailed picture of liquidity provision in the period around U.S. monetary policy announcements; the bid-ask spread, market depth, and order book slope. We show that liquidity is removed (spreads are wider, depth is lower, and the slope is flatter) from the market around 2-mins prior to the announcement, is exceptionally low at the time of the announcement, and then reverts to normal within 9-mins of the announcement. The magnitude of the liquidity response is influenced by the size of the monetary policy surprise, and the term structure of the futures curve.

Keywords: Energy markets, Crude oil futures, WTI, Monetary policy decisions, Liquidity

JEL Classification: G1, G10, G14, Q02, Q43

Suggested Citation

Smales, Lee A., Slopes, Spreads, and Depth: Monetary Policy Announcements and Liquidity Provision in the Energy Futures Market (October 31, 2016). Available at SSRN: https://ssrn.com/abstract=2861724 or http://dx.doi.org/10.2139/ssrn.2861724

Lee A. Smales (Contact Author)

University of Western Australia ( email )

UWA Business School
35 Stirling Highway
Perth, Western Australia 6009
Australia

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