Progress 01/15/15 to 09/30/19
Outputs
Target Audience:Research results during this reporting period should be of interest to academics and industry professionals from across the U.S. and around the globe. Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided?Training activities during the project have mainly focused on intensive teamwork involving the PhD students and their mentors. How have the results been disseminated to communities of interest?Article publication and presentation at the NCCC-134 Conference on Commodity Price Analysis, Forecasting, and Market Risk Management have contributed to disseminating results to communities of interest. What do you plan to do during the next reporting period to accomplish the goals?
Nothing Reported
Impacts
What was accomplished under these goals?
The main accomplishments lie inthe elaboration of four research articles that contribute to a better understanding of market behavior in the era of electronic and high speed trading. See below for a list of the papers and a brief summary of the findings. Title: Microstructure Noise and Realized Variance in the Live Cattle Futures Market Abstract: Recently, U.S. live cattle futures prices have experienced high levels of intraday price variance, which have raised concerns about the possible impact of microstructure noise from high frequency trading on market instability. This article identifies both the magnitude and the duration of the bias caused by market microstructure noise in measuring efficient price variance in the live cattle futures market from 2011 to 2016, with emphasis on price variance behavior in recent years. Market microstructure noise increases observed price variance, but its effects are not large and do not last more than three to four minutes in response to changing information. Intraday price variance has increased in recent years, but the findings provide little evidence that high frequency traders were responsible for economically meaningful market noise. Informatively, steps taken by the CME and cattle producers to mitigate noise have not been fruitful to date, and signal that the magnitude of noise will likely vary with the magnitude of changes in demand and cyclical supply. Title: Measuring Price Discovery between Nearby and Deferred Contracts in Storable and Non-Storable Commodity Futures Markets Abstract: Futures market contracts with varying maturities are traded concurrently and the speed at which they process information on the value of the underlying commodity is of relevance in understanding the price discovery process. Using price discovery measures, including Putni's (2013) information leadership share and intraday data, we quantify the proportional contribution of price discovery between nearby and deferred contracts 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 one week before the maturity month in corn and about two weeks before the maturity month in live cattle. Regression results indicate that the share of price discovery is mainly explained by trading volume in both markets. Additionally, price discovery is affected by time to expiration, USDA announcements, commodity index position rolls, and to a lesser extent by inverse carrying charges, market crashes, and pit trading closure. The effects of these other factors vary between the markets which likely reflect differences in liquidity and in storability. Title: Liquidity Costs during "Flash Events" in Corn and Lean Hog Futures Markets Abstract: The Commodity Futures Trading Commission (CFTC) recently identified significant price changes in intraday time trading or "flash events" in major commodity futures markets. These flash events fueled discussion on whether futures markets are becoming less effective as human intervention is diminishing in favor of algorithmic trading. Using intra-day data, we examine the quoted spreads, depth, and their resilience during "flash events" in corn and lean hog futures markets. Overall, we find little evidence that the liquidity provision in agricultural futures markets is fragile even when large price movements occur. Our analysis suggests that flash events are heavily influenced by unanticipated changes in fundamentals that may lead to a new equilibrium price. Liquidity conditions during these events are more suggestive of high-speed market making than of harmful algorithmic trading. Title: Are Corn Futures Prices Getting "Jumpy"? Abstract: The article sheds light on price jump risk in corn futures prices in the era of electronic trading and after the shift to real-time announcement of USDA reports. Using intraday prices from 2008 to 2015, we employ a nonparametric test to detect jumps and variance analysis to assess the relative importance of jump risk. Real-time trading of major USDA reports has substantially increased the frequency and clustering of price jumps, and results in higher market liquidity costs. In contrast, while the presence of jumps on non-announcement days has doubled recently, their magnitude has declined as have transactions costs during their occurrence. The largest jump risk or execution risk is experienced by high frequency traders due to heightened microstructure noise during price jumps. However, traders holding long-term market positions are only minimally affected by increased jump risk.
Publications
- Type:
Journal Articles
Status:
Published
Year Published:
2018
Citation:
Couleau, A., Serra, T. and P. Garcia. 2018. Microstructure Noise and Realized Variance in the Live Cattle Futures Market. American Journal of Agricultural Economics, Vol 101, No.2, 563-578.
A preliminary version of the paper was presented at the NCCC-134 Conference on Commodity Price Analysis, Forecasting, and Market Risk Management, St. Louis, Missouri, April 24-25, 2017.
https://doi.org/10.1093/ajae/aay052.
- Type:
Journal Articles
Status:
Under Review
Year Published:
2020
Citation:
Hu, Z., Mallory, M., Serra, T. and P. Garcia. 2019. Measuring Price Discovery between Nearby and Deferred Contracts in Storable and Non-Storable Commodity Futures Markets. Agricultural Economics (Revise and Resubmit).
A preliminary version of the paper was presented at the NCCC-134 Conference on Commodity Price Analysis, Forecasting, and Market Risk Management, St. Louis, Missouri, April 24-25, 2017.
- Type:
Journal Articles
Status:
Under Review
Year Published:
2020
Citation:
He, X., Serra, T. and P. Garcia. 2019. Liquidity Costs during Flash Events in the Corn and Lean Hog Futures Market. American Journal of Agricultural Economics (Revise and Resubmit).
A preliminary version of the paper was presented at the NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management, Minneapolis, Minnesota, April 16-17, 2018.
- Type:
Journal Articles
Status:
Under Review
Year Published:
2020
Citation:
Couleau, A., Serra, T. and P. Garcia. 2019. Are Corn Futures Prices Getting Jumpy? American Journal of Agricultural Economics (Revise and Resubmit).
A preliminary version of the paper was presented at the NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management, Minneapolis, Minnesota, April 16-17, 2018.
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Progress 10/01/17 to 09/30/18
Outputs
Target Audience:Research results during this reporting period should be of interest to academics and industry professionals from across the U.S. and around the globe. Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided?Training activities during this year have mainly focused on intensive teamwork involving the PhD students and their mentors. How have the results been disseminated to communities of interest?Article publication and presentation at the NCCC-134 Conference on Commodity Price Analysis, Forecasting, and Market Risk Management have contributed to disseminatingresults to communities of interest. What do you plan to do during the next reporting period to accomplish the goals?During the next year we will continue to work on this area by developing new research.
Impacts
What was accomplished under these goals?
The main accomplishments during the reporting year are as follows: First,revision of the article entitled "Microstructure Noise and Realized Variance in the Live Cattle Futures Market" by Couleau, Serra and Garcia, following second-round review comments of the American Journal of Agricultural Economics. The paper has been accepted for publication. Abstract:Recently, U.S. live cattle futures prices have experienced high levels of intraday price variance which have raised concerns about the possible impact of microstructure noise from high frequency trading on market instability. This article identifies both the magnitude and the duration of the bias caused by market microstructure noise in measuring efficient price variance in live cattle futures marketsfrom 2011 to 2016, with emphasis on price variance behavior in recent years. Market microstructure noise increases observed price variance, but its effects are not large and do not last more than three to four minutes in response to changing information. Intraday price variance has increased in recent years, but the findings provide little evidence that high frequency traders were responsible for economically meaningful market noise. Informatively, steps taken by the CME and cattle producers to mitigate noise have not been fruitful to date, and signal that the magnitude of noise will likely vary with the magnitude of changes in demand and cyclical supply. Second,revision of the article "Measuring Price Discovery between Nearby and Deferred Contracts in Storable and Non-Storable Commodity Futures Markets" by Hu, Mallory, Serra and Garcia, following first-round review comments of the American Agricultural Economics. The paper has been resubmitted to the journal. Abstract:Futures market contracts with varying maturities are traded concurrently and the speed at which they process information on the value of the underlying commodity is of relevance in understanding the price discovery process. Using price discovery measures, including PutnI'š' (2013) information leadership share and intraday data, we quantify the proportional contribution of price discovery between nearby and deferred contracts 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 within oneweek before maturity month in corn and about twoweeks before maturity month in live cattle. Regression results indicate that the share of price discovery is mainly explained by trading volume in both markets. Additionally, price discovery is affected by time to expiration, USDA announcements, commodity index position rolls, and to a lesser extent by inverse carrying charges, market crashes, and pit trading closure. The effects of these other factors vary between the markets which likely reflect differences in liquidity and in storability. Third, elaboration of a new research article entitled "Are Corn Futures Prices Getting Jumpy?" by Couleau, Serra and Garcia. The paper has been presented at the NCCC-134 meetings and submitted to the American Journal of Agricultural Economics for publication consideration. Abstract:Corn futures markets have experienced increased intraday price jumps which have been blamed on public information shocks and the reduced trading latency brought by electronic trading. This article assesses intraday jumps in the corn futures nearby transaction prices from 2008 to 2015. We use a nonparametric jump test and a variance analysis to estimate jump risk. Our results suggest that the real-time trading of major USDA reports has substantially increased the frequency and the magnitude of jump risk. In contrast, results suggest that the electronic platform along with reduced latency may have increased liquidity and prevented price spikes on non-USDA report days. Fourth,elaboration of a new research article entitled "Cost of Immediacy During Large Price Movements: Evidence from the Corn Futures Market" by He, Serra and Garcia. Abstract:Bid-ask spread is a common gauge for the liquidity cost faced by participants of agricultural commodity futures markets. This paper examines the resiliency of bid-ask spread in corn futures markets during intra-day periods of large price movements from 2014 to 2017. We find that while the price is volatile, bid-ask spread is highly resilient as it reverts quickly towards the normal level in response to liquidity shocks. Substantial decline in a higher-than-usual liquidity cost is observed within 5 - 20 seconds, with the rate of recovery being the highest during large price movements after USDA announcements. Our results indicate that traders face an assured level of liquidity costs whenever the immediate execution is demanded and assuage the concerns of market liquidity being fragile under extreme market conditions.The paper is not yet complete and we will continue working on it during this academic year.
Publications
- Type:
Journal Articles
Status:
Accepted
Year Published:
2018
Citation:
Couleau, A., Serra, T. and Garcia, P. 2018. Microstructure Noise and Realized Variance in the Live Cattle Futures Market. American Journal of Agricultural Economics. https://doi.org/10.1093/ajae/aay052.
- Type:
Journal Articles
Status:
Under Review
Year Published:
2018
Citation:
Hu, Z., Mallory, M., Serra, T. and Garcia, P. 2018. Measuring Price Discovery Between Nearby and Deferred Contracts in Storable and Non-Storable Commodity Futures Markets. American Journal of Agricultural Economics (Second Round Review).
- Type:
Journal Articles
Status:
Under Review
Year Published:
2018
Citation:
Couleau, A., Serra, T. and Garcia, P. 2018. Are Corn Futures Prices Getting Jumpy?. American Journal of Agricultural Economics (First Round Review).
- Type:
Conference Papers and Presentations
Status:
Other
Year Published:
2018
Citation:
He, X., Serra, T. and Garcia, P. 2018. Measuring Resiliency of Futures Commodity Markets Around Extreme Price Change. Paper presented at the NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management, Minneapolis, Minnesota, April 16-17, 2018.
- Type:
Conference Papers and Presentations
Status:
Other
Year Published:
2018
Citation:
Couleau, A., Serra, T. and Garcia, P. 2018. The Importance of Intraday Jumps and Speed Trading in the U.S. Futures Corn Prices. Paper presented at the NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management, Minneapolis, Minnesota, April 16-17, 2018.
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Progress 10/01/16 to 09/30/17
Outputs
Target Audience:Research results during this reporting period should be of interest to academics and industry professionals from across the U.S. and around the globe. Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided?Training activities during this year have mainly focused on intensive teamwork involving the PhD students and their mentors. The unquestionable expertise of Professor Phil Garcia in agricultural commodity prices, as well as the econometric skills of Professor Teresa Serra, have contributed to increase Anabelle Couleau's and Zhepeng Hu's knowledge of both the sector under study and the techniques applied to answer our research questions. Their papers will be part of their PhD Theses. How have the results been disseminated to communities of interest?Both articles were presented at the NCCC-134 Conference on Commodity Price Analysis, Forecasting, and Market Risk Management, St. Louis, Missouri, April 24-25, 2017. What do you plan to do during the next reporting period to accomplish the goals?During the next year we will continue to work on this area by developing new research. We are currently exploring the flash events in agricultural futures markets.
Impacts
What was accomplished under these goals?
The two main accomplishments during the reporting year are the elaboration of a new research article and the revision of the article elaborated last year according to journal referee comments. Details are offered below: During the reporting period, the following research article has been developed:Measuring price discovery between nearby and deferred contracts in storable and non-storable commodities authored byZhepeng Hu, Mindy Mallory, Teresa Serra, and Phil Garcia. Abstract: In futures markets contracts with varying maturities are traded simultaneously. It is often of interest to determine which contract leads price discovery. Using the information leadership share (ILS) approach, we investigate whether and when the nearby contract dominates price discovery in corn and live cattle futures markets using high frequency data. In the corn futures market, the nearby contract significantly dominates all deferred contracts. Compared to corn futures, the live cattle nearby contract has a relatively weak dominance in price discovery, which is mainly due to their difference in storability. In both markets, the price discovery contribution of the nearby contract increases as more it is compared with a more distant contract, suggesting that contracts with more trading volume and shorter maturities make larger contributions to the price discovery process. This finding, in general, also holds in the periods of backwardation and market crash as well as on USDA report days. For both markets, the contribution of the nearby contract decreases as expiration approaches and trading volume declines. The nearby contract loses its dominant role when it is no longer the most active contract. This paper will constitute part of the PhD Thesis of Zhepeng Hu, a PhD student in the ACE Department UIUC. With this article we have addressed the main objectives of the project (we have conducted a literature review on price discovery based on high frequency data, we have applied recent methodological approaches and compared among them). During the reporting period, the research team has worked on revising the article 'Assessing the effects of microstructure noise on realized volatility in the live cattle futures market' according to the American Journal of Agricultural Economics' referee comments. It will soon be resumbitted to the journal.
Publications
- Type:
Conference Papers and Presentations
Status:
Under Review
Year Published:
2017
Citation:
Couleau, A., Serra, T. and Garcia, P. 2017. Assessing the effects of microstructure noise on realized volatility in the live cattle futures market. Paper accepted for presentation at the NCCC-134 Conference on Commodity Price Analysis, Forecasting, and Market Risk Management, St. Louis, Missouri, April 24-25, 2017.
- Type:
Conference Papers and Presentations
Status:
Other
Year Published:
2017
Citation:
Mallory, M., Serra, T., Hu, Z.and Garcia, P. 2017. Measuring price discovery between nearby and deferred contracts in storable and non-storable commodities. Paper accepted for presentation at the NCCC-134 Conference on Commodity Price Analysis, Forecasting, and Market Risk Management, St. Louis, Missouri, April 24-25, 2017.
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Progress 10/01/15 to 09/30/16
Outputs
Target Audience:During this period a thorough research has been conducted on the microstructure noise in live cattle futures markets. The efficient price has also been derived for this market, as well as the response of the observed prices to changes to the latent efficient price. This work constitutes the first chapter of thePhD thesis of Anabelle Couleau, a PhD studentin the ACE Department (UIUC). Results have not yet been presented, but the paper will be sent out for publication consideration in a few weeks. Research results during this reporting period should be of interest to academics and industry professionals from across the U.S. and around the globe. The contribution to the literature is substantial, as no other published research has identified microstructure noise in agricultural commodity markets using high frequency data. The live cattle producers and industry, as well as live cattle futures markets participants, should find research results from this period especially interesting. Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided?Training activities during this year have mainly focused on intensiveteam workinvolving the PhD student and thementors. The unquestionable expertise of Professor Phil Garcia in agricultural commodity prices, as well as the econometric skillsof Professor Teresa Serra have contributed to increase Anabelle Couleau's knowledge of both the sector under study and the techniques applied to answer our research questions. This paper constitutesAnabelle Couleau'sSecond Year Researchpaper in our PhD program and obtained the qualification of Pass with Distinction, the highest possible qualification. We are confident that we have been able to bring her knowledge and skills to a higher level. How have the results been disseminated to communities of interest?The article has not yet been presented outside the boundaries of our department, but will be presented in scientific meetings during the following academic year. What do you plan to do during the next reporting period to accomplish the goals?During the next reporting period, and as noted above, we will continue to work on this area by developing a new research article. The main objective of this article will be to study the connection that exists between high frequency trading activities in financial markets and spot markets. More specifically, with this study we aim at responding to what extent do highly frequent activities in financial markets affect spot markets.
Impacts
What was accomplished under these goals?
During the reporting period, the following research article has been developed. This paper will constitute the first chapter of the PhD Thesis of Anabelle Couleau, a PhD student at the ACE Department UIUC. Title of the research: Assessing the Effects of Microstructure Noise on Realized Volatility in the Live Cattle Futures Market. Authors: Anabelle Couleau, Teresa Serra and Phil Garcia Abstract: This paper identifies the market microstructure noise present in high frequency data and its implications for realized volatility of returns in live cattle futures markets from 2011 to 2015. Realized volatility is modeled as a three-component measure containing the efficient price return volatility and the distortions caused by noise through the realized variance of noise and the correlation of the return noise with price returns. Noise volatility is found to substantially increase realized volatility when data are sampled every second and to fade at 4-minute frequency sampling. Distortions caused by noise are found to be especially relevant during periods of important efficient price volatility (such as 2015), to represent between 24 and 34% of the tick size for mid-quotes, and to be negatively correlated with efficient price returns. Noise volatility is found to be lower in the least traded contracts than in the most traded contracts, where the activity of High Frequency Traders (HFTers) are expected to concentrate. Important policy implications are drawn. In this paper, the major objectives of the project have been addressed: 1) A literature review on the proper modelization of price behavior and market microstructure in light of HFT has been conducted. 2) The innovative methodological approach by Hansen and Lunde (2005) has been applied, which encompasses both parametric and nonparametric methods.Ours represents the first work to apply thisapproach to agricultural commodity markets. 3) Different methodological proposals and the policy conclusions derived from them have been applied. More specifically, the identification of the market microstructure noise has been done by using two different approaches, a nonparametric and a parametric one. Also, the development of this research has led the research team to identify further relevant ideas to explore, which have started to be recently pursued.
Publications
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Progress 01/15/15 to 09/30/15
Outputs
Target Audience:Research results during thefirst reporting periodwere presented at the 2015 NCCC-134 Annual Meeting on Applied Commodity Price Analysis, Forecasting, and Market Risk Management (March 27, 2015, St. Louis, Missouri).The meeting offers a national and international forum for applied research discussion. members of the target audience included academics and industry professionals from across the U.S. and around the globe. Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided?Recent developments in commodity markets (financialization, increases in biofuel production, climate change, raising demand for agricultural commodities, etc.) may have involved profound shifts in the way commodity markets operate. Previous literature has looked at whether and how these changes have impacted market efficiency and efficacy in the traditional roles of risk mitigation, coordinating production, and coordinating consumption through time. However, how these changes affect commodity markets tick-by-tick and quote-by-quote had not yet been considered. Since global price discovery occurs on global futures exchanges for the major food commodities, a deep consideration of these changes on trading activity, patterns, and consequences is warranted. During the first reporting period, we have used high frequency data (time stamped to the second) in order to allow for faster price change adjustments taking place after significant technical developments in trading platforms in the second half of the 2000's, characterized by high speed trading. Our work has contributed to professional development by providing insights into the speed at which information is transmitted from the nearby to the deferred contracts. We focused our attention on the corn market because it has experienced some of the most pronounced changes in recent years. As noted above, results indicate that by one second, any information that arrived to the market had been fully transmitted across all contract maturities. How have the results been disseminated to communities of interest?As noted in the Products section, the paper has been presented at the NCCC-134 Conference on Applied Commodity Price Analysis and published in the Conference proceedings. What do you plan to do during the next reporting period to accomplish the goals?
Nothing Reported
Impacts
What was accomplished under these goals?
During this first reporting period, we have made progress on the second objective of the project. A brief description of our findings is offered below: The recent 'Financialization' of commodity futures markets, increases in biofuel production, climate change and rising demand for agricultural commodities potentially have imposed profound shifts in the way commodity futures markets operate. Through the article by Mallory, Garcia and Serra (2015), commodity markets tick-by-tick and quote-by-quote have been examined to develop metrics on liquidity and transformation of information. The metrics are based on insights we combined from the sequential trading models on single securities, index futures based on a basket of securities, and special features of commodity futures markets. Correlation between quote revisions in nearby and deferred contracts measure information-based activity, and correlations between revisions of the time lagged nearby and deferred maturity measure the speed at which information is transmitted among the different futures maturities. Information based trading results in near perfect correlation between revisions to bids and offers in nearby and deferred contracts. We find that within one second information has been fully transmitted from nearby to deferred contracts.
Publications
- Type:
Conference Papers and Presentations
Status:
Published
Year Published:
2015
Citation:
Mallory, M., P. Garcia and T. Serra. Nearby And Deferred Quotes: What They Tell Us About Linkages And Adjustments to Information. Proceedings of the NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management. St. Louis, MO. [http://www.farmdoc.illinois.edu/nccc134].
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