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Measuring price discovery between nearby and deferred contracts in storable and nonstorable commodity futures markets
Author(s) -
Hu Zhepeng,
Mallory Mindy,
Serra Teresa,
Garcia Philip
Publication year - 2020
Publication title -
agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.29
H-Index - 82
eISSN - 1574-0862
pISSN - 0169-5150
DOI - 10.1111/agec.12594
Subject(s) - price discovery , futures contract , economics , position (finance) , market liquidity , futures market , financial economics , monetary economics , market price , commodity , dominance (genetics) , commodity market , business , microeconomics , finance , biochemistry , chemistry , gene
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.