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Microstructure Noise and Realized Variance in the Live Cattle Futures Market

Author

Listed:
  • Anabelle Couleau
  • Teresa Serra
  • Philip Garcia

Abstract

Recently, U.S. live cattle futures prices have experienced high levels of intraday price variance, which have raised concerns about the possible impact of microstructure noise from high frequency trading on market instability. This article identifies both the magnitude and the duration of the bias caused by market microstructure noise in measuring efficient price variance in the live cattle futures market from 2011 to 2016, with emphasis on price variance behavior in recent years. Market microstructure noise increases observed price variance, but its effects are not large and do not last more than three to four minutes in response to changing information. Intraday price variance has increased in recent years, but the findings provide little evidence that high frequency traders were responsible for economically meaningful market noise. Informatively, steps taken by the CME and cattle producers to mitigate noise have not been fruitful to date, and signal that the magnitude of noise will likely vary with the magnitude of changes in demand and cyclical supply.

Suggested Citation

  • Anabelle Couleau & Teresa Serra & Philip Garcia, 2019. "Microstructure Noise and Realized Variance in the Live Cattle Futures Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 101(2), pages 563-578.
    • Handle: RePEc:oup:ajagec:v:101:y:2019:i:2:p:563-578.
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    File URL: http://hdl.handle.net/10.1093/ajae/aay052
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    Citations

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    Cited by:

    1. Bunek, Gabriel D. & Janzen, Joseph P., 2024. "Does public information facilitate price consensus? Characterizing USDA announcement effects using realized volatility," Journal of Commodity Markets, Elsevier, vol. 33(C).
    2. Steffen Volkenand & Günther Filler & Martin Odening, 2020. "Price Discovery and Market Reflexivity in Agricultural Futures Contracts with Different Maturities," Risks, MDPI, vol. 8(3), pages 1-17, July.
    3. Kun Peng & Zhepeng Hu & Michel A. Robe, 2024. "Maximum order size and market quality: Evidence from a natural experiment in commodity futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(5), pages 803-825, May.
    4. Joshua Huang & Teresa Serra & Philip Garcia, 2021. "The Value of USDA Announcements in the Electronically Traded Corn Futures Market: A Modified Sufficient Test with Risk Adjustments," Journal of Agricultural Economics, Wiley Blackwell, vol. 72(3), pages 712-734, September.
    5. Xinyue He & Teresa Serra & Philip Garcia, 2021. "Resilience in “Flash Events” in the Corn and Lean Hog Futures Markets," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(2), pages 743-764, March.
    6. Peng, Kun & Hu, Zhepeng & Robe, Michel A., 2020. "Maximum Order Size and Agricultural Futures Market Quality: Evidence from a Natural Experiment," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304596, Agricultural and Applied Economics Association.
    7. Xinyue He & Teresa Serra, 2022. "Are price limits cooling off agricultural futures markets?," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(5), pages 1724-1746, October.
    8. Zhou, Xinquan & Bagnarosa, Guillaume & Gohin, Alexandre & Pennings, Joost M.E. & Debie, Philippe, 2023. "Microstructure and high-frequency price discovery in the soybean complex," Journal of Commodity Markets, Elsevier, vol. 30(C).

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