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Abstract
Understanding the determinants of liquidity costs in agricultural futures markets is
hampered by a need to use proxies for the bid-ask spread which are often biased, and by a failure to account for a jointly determined micro-market structure. We estimate liquidity costs and its determinants for the live cattle and hog futures markets using alternative
liquidity cost estimators, intraday prices and micro-market information. Volume and
volatility are simultaneously determined and significantly related to the bid-ask spread.
Daily volume is negatively related to the spread while volatility and volume per
transaction display positive relationships. Electronic trading has a significant competitive effect on liquidity costs, particularly in the live cattle market. Results are sensitive to the bid-ask spread measure, with a modified Bayesian method providing estimates most consistent with expectations and the competitive structure found in these markets.