Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

The impact of order imbalance on returns, liquidity, and volatility in agricultural commodity markets

The impact of order imbalance on returns, liquidity, and volatility in agricultural commodity... The purpose of this paper is to investigate and compare the impact of order imbalance on returns, liquidity and price volatility in agricultural futures markets on an intraday basis. The authors examine whether order imbalance is more powerful to explain variations in asset prices compared to other indicators of trading activity, particularly trading volume.Design/methodology/approachUsing Chicago Mercantile Exchange best bid best offer data, the impact of order imbalance is analyzed via regression analyses. The analyses are carried out for corn, wheat, soy, live cattle and lean hogs in March 2008 and March 2016.FindingsResults confirm the positive relation between order imbalance and returns as well as between order imbalance and price volatility as suggested by market microstructure models. Order imbalance, however, does not generally outperform trading volume as an explanatory variable.Practical implicationsFor some contracts, returns can be predicted using lagged order imbalance. This offers the opportunity to derive profitable trading strategies.Originality/valueThis paper is one of the first attempts to explore the relationship between order imbalance and returns, liquidity and volatility for agricultural commodity futures on an intraday basis, accounting for the increased trading volume and for the high speed at which new information enters the market in an electronic trading environment. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Agricultural Finance Review Emerald Publishing

The impact of order imbalance on returns, liquidity, and volatility in agricultural commodity markets

Download PDF
21 pages

Loading next page...
 
/lp/emerald-publishing/the-impact-of-order-imbalance-on-returns-liquidity-and-volatility-in-py0aIEWyb5
Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0002-1466
DOI
10.1108/afr-10-2017-0099
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to investigate and compare the impact of order imbalance on returns, liquidity and price volatility in agricultural futures markets on an intraday basis. The authors examine whether order imbalance is more powerful to explain variations in asset prices compared to other indicators of trading activity, particularly trading volume.Design/methodology/approachUsing Chicago Mercantile Exchange best bid best offer data, the impact of order imbalance is analyzed via regression analyses. The analyses are carried out for corn, wheat, soy, live cattle and lean hogs in March 2008 and March 2016.FindingsResults confirm the positive relation between order imbalance and returns as well as between order imbalance and price volatility as suggested by market microstructure models. Order imbalance, however, does not generally outperform trading volume as an explanatory variable.Practical implicationsFor some contracts, returns can be predicted using lagged order imbalance. This offers the opportunity to derive profitable trading strategies.Originality/valueThis paper is one of the first attempts to explore the relationship between order imbalance and returns, liquidity and volatility for agricultural commodity futures on an intraday basis, accounting for the increased trading volume and for the high speed at which new information enters the market in an electronic trading environment.

Journal

Agricultural Finance Review – Emerald Publishing

Published: Sep 17, 2018

Keywords: Liquidity; Returns; Market microstructure; Agricultural futures markets; Order imbalance; Price volatility

References

  • Dealership market: market making with inventory
    Amihud, Y.; Mendelson, H.
  • Price volatility, trading volume, and market depth: evidence from futures markets
    Bessembinder, H.; Seguin, P.J.
  • Market microstructure: a survey of microfoundations, empirical results and policy implications
    Biais, B.; Glosten, L.; Spatt, C.
  • Order imbalance and individual stock returns: theory and evidence
    Chordia, T.; Subrahmanyam, A.
  • Order imbalance, liquidity, and market returns
    Chordia, T.; Roll, R.; Subrahmanyam, A.
  • Time and the process of security price adjustment
    Easley, D.; O’Hara, M.
  • Time-varying arrival rates of in-formed and uninformed trades
    Easley, D.; Engle, R.F.; O’Hara, M.; Wu, L.
  • Liquidity, information, and infrequently traded stocks
    Easley, D.; Kiefer, N.M.; O’Hara, M.; Paperman, J.B.
  • Efficient capital markets: II
    Fama, E.F.
  • Bid-ask spreads, volume, and volatility: evidence from livestock markets
    Frank, J.; Garcia, P.
  • Market microstructure
    Garman, M.
  • Bid, ask, and transaction prices in a specialist market with heterogeneously informed agents
    Glosten, L.R.; Milgrom, P.
  • Order flow imbalance effects on the German stock market
    Hanke, M.; Weigerding, M.
  • Common factors in prices, order flows, and liquidity
    Hasbrouck, J.; Seppi, D.J.
  • The dynamics of dealer markets under competition
    Ho, T.; Stoll, H.
  • Market microstructure and stock market returns
    Huang, R.D.; Stoll, H.
  • The components of the bid-ask spread: a general approach
    Huang, R.D.; Stoll, H.
  • Financialization and structural change in commodity futures markets
    Irwin, S.H.; Sanders, D.R.
  • The relation between price changes and trading volume: a survey
    Karpoff, J.M.
  • Continuous auctions and insider trading
    Kyle, S.
  • Inferring trade direction from intraday data
    Lee, C.; Ready, M.J.
  • Trading volume: definitions, data analysis, and implications of portfolio theory
    Lo, A.; Wang, J.
  • Nearby and deferred quotes: what they tell us about linkages and adjustments to information
    Mallory, M.; Garcia, P.; Serra, T.
  • Electronic versus open outcry trading in agricultural commodities futures
    Martinez, V.; Gupta, P.; Tse, Y.; Kittiakarasakun, J.
  • Comparison of selected trade classification algorithms on the Warsaw stock exchange
    Olbrys, J.; Mursztyn, M.
  • Futures market depth: revealed vs. perceived price order imbalances
    Pennings, J.M.E.; Garcia, P.; Marsh, L.W.
  • Grain marketing strategies within and across lifetimes
    Peterson, H.H.; Tomek, W.G.
  • The dynamics of commodity spot and futures markets: a primer
    Pindyck, R.S.
  • Autocorrelated order-imbalance and price momentum in the stock market
    Ravi, R.; Sha, Y.
  • A simple implicit measure of the effective bid-ask spread in an efficient market
    Roll, R.
  • Proof that properly anticipated prices fluctuate randomly
    Samuelson, P.A.
  • The components of the bid-ask spread: evidence from the corn futures market
    Shang, Q.; Mallory, M.; Garcia, P.
  • Which road to an efficient stock market: free competition or regulated monopoly?
    Smidt, S.
  • The supply of dealer services in securities markets
    Stoll, H.
  • Trading volume and transaction costs in futures markets
    Wang, G.H.K.; Yau, J.; Baptiste, T.
  • The behavior of bid-ask spreads in the electronically-traded corn futures market
    Wang, X.; Garcia, P.; Irwin, S.H.
  • Are agricultural futures getting noisier? The impact of high frequency quoting in the corn market
    Wang, X.; Garcia, P.; Irwin, S.H.
  • Trading activity and price behavior in Chinese agricultural futures markets
    Wang, X.; Ye, Q.; Zhao, F.