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Effective Bid-Ask Spreads in Futures versus Futures Options

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  • Shah, Samarth
  • Brorsen, B. Wade
  • Anderson, Kim B.

Abstract

While considerable research has estimated liquidity costs of futures trading, little comparable research is available about options markets. This study determines effective bid-ask spreads in options and futures markets for Kansas City Board of Trade (KCBT) wheat. Effective bid-ask spreads are estimates of the actual liquidity cost of a round-trip order. Option liquidity costs are estimated using a new measure of effective spreads developed for options markets. Futures effective spreads are estimated using eight different measures developed in previous studies. Estimated effective bid-ask spreads of options contracts are at least double the effective bid-ask spreads of open-outcry futures contracts.

Suggested Citation

  • Shah, Samarth & Brorsen, B. Wade & Anderson, Kim B., 2012. "Effective Bid-Ask Spreads in Futures versus Futures Options," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(3), pages 1-14.
    • Handle: RePEc:ags:jlaare:142355
    DOI: 10.22004/ag.econ.142355
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    References listed on IDEAS

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    3. B. Wade Brorsen & Darren W. Buck & Stephen R. Koontz, 1998. "Hedging hard red winter wheat: Kansas City versus Chicago," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 18(4), pages 449-466, June.
    4. B. Wade Brorsen, 1989. "Liquidity costs and scalping returns in the corn futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 9(3), pages 225-236, June.
    5. Choi, J. Y. & Salandro, Dan & Shastri, Kuldeep, 1988. "On the Estimation of Bid-Ask Spreads: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(2), pages 219-230, June.
    6. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
    7. Chu, Quentin C & Ding, David K & Pyun, C S, 1996. "Bid-Ask Bounce and Spreads in the Foreign Exchange Futures Market," Review of Quantitative Finance and Accounting, Springer, vol. 6(1), pages 19-37, January.
    8. Henry Bryant & Michael Haigh, 2004. "Bid-ask spreads in commodity futures markets," Applied Financial Economics, Taylor & Francis Journals, vol. 14(13), pages 923-936.
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    Cited by:

    1. Li, Miao & Xiong, Tao, 2023. "Is China's new live hog futures market efficient? Evidence from an analysis of market quality, price discovery and hedging effectiveness," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 68(01), September.
    2. Miao Li & Tao Xiong & Ziran Li, 2023. "A tale of two contracts: Examining the behavior of bid–ask spreads of corn futures in China," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(6), pages 792-806, June.
    3. Joseph P. Janzen & Michael K. Adjemian, 2017. "Estimating the Location of World Wheat Price Discovery," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(5), pages 1188-1207.
    4. Andrew M. McKenzie & Michael R. Thomsen & Michael K. Adjemian, 2022. "Characterizing implied volatility functions from agricultural options markets," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(5), pages 1605-1624, October.

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