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Price Discovery in Thinly Traded Futures Markets: How Thin is Too Thin?

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  • Philipp Adämmer
  • Martin T. Bohl
  • Christian Gross

Abstract

It is still an unanswered question how much trading activity is needed for efficient price discovery in commodity futures markets. For this purpose, we investigate the price discovery process of two thinly traded agricultural futures contracts traded at the European Exchange in Frankfurt. Our empirical results show that the trading volume threshold which is necessary to facilitate efficient price discovery is very low. As our findings are based on constant and time‐varying vector error correction models, we also show that neglecting time‐variation in the parameters can lead to misleading results. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:851–869, 2016

Suggested Citation

  • Philipp Adämmer & Martin T. Bohl & Christian Gross, 2016. "Price Discovery in Thinly Traded Futures Markets: How Thin is Too Thin?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(9), pages 851-869, September.
    • Handle: RePEc:wly:jfutmk:v:36:y:2016:i:9:p:851-869
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices

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