Work

Measuring price discovery between nearby and deferred contracts in storable and nonstorable commodity futures markets

Year: 2020

Type: article

Abstract: Using price discovery measures, including Putniņš’ (2013) information leadership share and intraday data, we quantify the proportional contribution of nearby and deferred contracts in price discovery in the corn and live cattle futures markets. On average, nearby contracts reflect information more quickly than deferred contracts in the corn market, but have a relatively less dominant role in the live cattle market. In both markets, the nearby contract loses dominance when its relative volume share dips below 50%, which typically occurs when the nearby is close to maturity. Regression results indicate that the share of price discovery is mainly related to trading volume and time to expiration in both markets. In the corn market, price discovery share between nearby and deferred contracts is also related to inverse carrying charges, crop year differences, USDA announcements, market crashes, and commodity index position rolls. Differences between corn and live cattle markets are consistent with differences in the contracts’ liquidity and commodity storability.

Source: Agricultural Economics

DOI: 10.1111/agec.12594

Authors: Zhepeng Hu, Mindy Mallory, Teresa Serra, Philip Garcia

Institutions: University of Illinois Urbana-Champaign, Purdue University West Lafayette

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Zero hunger

Open Access status: green

Funders: U.S. Department of Agriculture, National Institute of Food and Agriculture