The Behavior of Bid‐Ask Spreads in the Electronically‐Traded Corn Futures Market

21 Pages Posted: 15 Apr 2020

See all articles by Xiaoyan Wang

Xiaoyan Wang

University of Illinois at Urbana-Champaign

Philip Garcia

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Scott H. Irwin

University of Illinois at Urbana-Champaign

Date Written: March 2014

Abstract

This is the first paper to analyze liquidity costs in agricultural futures markets based on the observed bid‐ask spread (BAS) faced by market participants. The results reveal a highly liquid corn market that mostly offers order execution at minimum cost. The BAS responds negatively to volume and positively to price volatility, but also affects volume traded and price volatility. While statistically significant, these responses on a cents/bushel or a percentage basis are generally small. Liquidity costs are also virtually impervious to short‐term changes in demand for spreading and trend‐following trader activity, as well as differences from day‐of‐the‐week changes in market activity. Much larger cents/bushel and percentage changes in BAS occur during commodity index trader roll periods and on USDA report release days. The roll period findings indicate a sunshine trading effect, while announcement effects identify the importance of unexpected information and adverse selection on order execution costs. Overall, our research demonstrates that the transition to electronic trading in the corn futures market has led to low and stable liquidity costs, despite the market turbulence in 2008–2009.

Keywords: commodity index funds, electronic corn futures market, liquidity costs, observed bid-ask spread, USDA reports

Suggested Citation

Wang, Xiaoyan and Garcia, Philip and Irwin, Scott, The Behavior of Bid‐Ask Spreads in the Electronically‐Traded Corn Futures Market (March 2014). American Journal of Agricultural Economics, Vol. 96, Issue 2, pp. 557-577, 2014, Available at SSRN: https://ssrn.com/abstract=3573716 or http://dx.doi.org/10.1093/ajae/aat096

Xiaoyan Wang (Contact Author)

University of Illinois at Urbana-Champaign ( email )

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Philip Garcia

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

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Scott Irwin

University of Illinois at Urbana-Champaign ( email )

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HOME PAGE: http://https://scotthirwin.com/

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