Estimating Liquidity Costs in Agricultural Futures Markets using Bayesian Methods

Julieta Frank and Philip Garcia

No 21331, 2006 Annual meeting, July 23-26, Long Beach, CA from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: Estimation of liquidity costs in futures markets is challenging because bid-ask spreads are usually not observed. Several estimators of liquidity costs exist that use transaction data, but there is little agreement on their relative accuracy and usefulness, and their performance has been questioned. We use a Bayesian method proposed by Hasbrouck which possesses conceptually desirable properties to estimate liquidity costs of six agricultural future contracts. The method builds on Roll's model and uses Markov Chain Monte Carlo estimation. Our Bayesian estimates are lower than more traditional estimates and as anticipated decrease even more when more realistic assumptions such as discreteness are incorporated. The findings demonstrate the need for further research to clarify the usefulness and accuracy of the procedure.

Keywords: Marketing (search for similar items in EconPapers)
Pages: 23
Date: 2006
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Related works:
Journal Article: Measuring the cost of liquidity in agricultural futures markets: Conventional and Bayesian approaches (2011)
Working Paper: Measuring Liquidity Costs in Agricultural Futures Markets (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea06:21331

DOI: 10.22004/ag.econ.21331

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