Heterogeneous Responses to Market Information and The Impact on Price Volatility and Trading Volume: The Case of Class III Milk Futures

Under the theoretical intraday microstructure framework, we analyze the impact of traders’ heterogeneous responses to market information on daily futures price and trading activity by utilizing the unique features of Class III milk futures contract. The cash settlement and classified pricing scheme distinguish milk futures from other commodities. We construct two variables, days to maturity and price deviates, to capture the distinctive features. While days to maturity indicate the length of time before cash settlement in the maturity month, price deviates reflect traders’ heterogeneous responses to weekly published information on milk prices. A structural price volatility-trading volume model is specified and is estimated using the Bayesian Markov chain Monte Carlo method. The results confirm that (i) the closer to cash settlement, the lower milk futures price volatility, which is opposite to the typical “Samuelson effect” for other commodity futures, and (ii) both price variability and trading volume are increasing functions of traders’ heterogeneous responses to market information and therefore are positively associated. The results can be seen as evidence that the USDA weekly published information has significant impact on price and trading activities in the milk futures market.