Bid-Ask Spreads, Volume, and Volatility: Evidence from Livestock Markets

Understanding the determinants of liquidity costs in agricultural futures markets ishampered by a need to use proxies for the bid-ask spread which are often biased, and by a failure to account for a jointly determined micro-market structure. We estimate liquidity costs and its determinants for the live cattle and hog futures markets using alternativeliquidity cost estimators, intraday prices and micro-market information. Volume andvolatility are simultaneously determined and significantly related to the bid-ask spread.Daily volume is negatively related to the spread while volatility and volume pertransaction display positive relationships. Electronic trading has a significant competitive effect on liquidity costs, particularly in the live cattle market. Results are sensitive to the bid-ask spread measure, with a modified Bayesian method providing estimates most consistent with expectations and the competitive structure found in these markets.