The components of the bid-ask spread: evidence from the corn futures market

Shang, Quanbiao

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https://hdl.handle.net/2142/90838 Copy

Description

Title

The components of the bid-ask spread: evidence from the corn futures market

Author(s)

Shang, Quanbiao

Issue Date

2016-04-27

Director of Research (if dissertation) or Advisor (if thesis)

Mallory, Mindy

Department of Study

Agr & Consumer Economics

Discipline

Agricultural & Applied Econ

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

M.S.

Degree Level

Thesis

Keyword(s)

• Bid-ask spread components
• market microstructure

Abstract

Using the Best Bid Offer data from the CME, this thesis decomposes the Bid-Ask Spread (BAS) in the Chicago Board of Trade (CBOT) corn futures market into its three components, which are adverse selection, inventory, and order processing costs. Approximately 34.8% of the BAS is attributable to the order processing cost, and the order processing cost is relatively stable across different months, days, or trading hours. Liquidity providers' inventory cost is the highest cost component at 53.1%. And the adverse selection cost is 12.1%, which is the smallest BAS component. However, the adverse selection component can be higher when corn prices are more volatile in 2008 and 2011 than other less volatile years of 2009 and 2010. In general, the monthly pattern of the adverse selection cost seems to be different from year to year; the intraday pattern of the adverse selection cost appears to be U-shaped. In contrast, the inventory cost pattern is a strong inverted U-shape. The intraday order processing cost is relatively stable throughout each trading day. The market conditions are relatively different between USDA announcement and no-announcement days, especially during market opening and closing hours. In the first trading hour on USDA announcement days, the adverse selection cost is higher but the inventory cost is lower than on no-announcement trading days. Overall, this thesis shows that the BAS in the CBOT electronically traded corn futures market is relatively low and stable, but the magnitude of each BAS component varies.

Graduation Semester

2016-05

Type of Resource

text

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http://hdl.handle.net/2142/90838

Copyright and License Information

Copyright 2016 Quanbiao Shang

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