The Determinants of Liquidity and the Role of the Market-Maker in Commodity Futures Markets

175 p.Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 1988.This dissertation considers the issue of liquidity in corn and oats futures contracts traded on the Chicago Board of Trade, in particular the factors that influence liquidity in futures markets are analyzed. Several methods from futures and securities literature are used to estimate average liquidity costs for both half-hour periods during the trading day and for daily intervals. Since the actual bid-ask spread is not recorded and cannot be used to determine the accuracy of the estimators, various estimates are compared to expectations from past theory and research in determining the most appropriate estimator of liquidity costs.Estimates of liquidity costs are analyzed using regression analysis to identify factors that influence the size and variability of liquidity costs in commodity futures markets. Regression results are also used in determination of the most appropriate estimator of liquidity costs.Of the methods tested, the average of the absolute value of price changes most closely conform to expectations and therefore, appears to be the most appropriate estimator of liquidity costs. The relatively poor performance of other methods that rely on strict informational efficiency suggests that this assumption probably does not hold in intra-day futures prices. Liquidity cost are approximately one quarter cent for corn, and one third to one half cent for oats.Results of the regression analysis suggest that economic factors such as the difference in the variance of prices, the volume of trading, and the ratio of scalper to total trading activity are significantly related to liquidity costs. The results also suggest that the relationships may not be constant across commodities.Liquidity costs are currently constrained to the minimum price change of one quarter cent per bushel. One implication of this study is that lowering the minimum price change below one quarter cent may reduce liquidity costs in corn futures contracts.U of I OnlyRestricted to the U of I community idenfinitely during batch ingest of legacy ETD