@article{Arzandeh:259344,
      recid = {259344},
      author = {Arzandeh, Mehdi and Frank, Julieta},
      title = {Price Discovery in Agricultural Futures Markets: Should We  Look Beyond the Best Bid-Ask Spread?},
      address = {2017-06-21},
      number = {1910-2017-1769},
      pages = {56},
      year = {2017},
      abstract = {Price discovery is defined as the incorporation of  information to prices through the actions of traders.  Previous studies in financial markets have found evidence  that informed traders may submit limit orders instead of  market orders. If so, the steps of limit order book (LOB)  beyond the best bid and best ask spread (BAS) contain  valuable information and contribute to price discovery of  the underlying asset. This is the first attempt to examine  the informativeness of the LOB beyond the BAS for  agricultural commodities. We reconstruct the LOB using  market depth data and use three information share  approaches to test whether the steps of LOB beyond the BAS  contribute to price discovery in agricultural commodity  markets. This is done for five major agricultural  commodities namely live cattle, lean hogs, corn, wheat, and  soybeans as well as the CME E-mini S&P 500. We find that a  substantial market depth exists at the steps beyond the  best bid and ask prices in the futures markets. The results  of the three information share measures show that the steps  of the LOB beyond the BAS contribute by over 27% to price  discovery of futures contracts. Across agricultural  commodities, the steps of the LOB beyond the BAS have more  information for grains than meats. Moreover, we find that  the steps closer to the top of the book, relative to the  steps farther, contain more information. These findings  suggest that informed traders in futures electronic markets  actively use limit orders with price steps beyond the BAS  and especially the steps near the top of the book. The  results also show that for E-mini S&P 500, the steps closer  to the top of the book contain more information at the  beginning and the end of the week whereas steps farther  have more information in the middle of the week. },
      url = {http://ageconsearch.umn.edu/record/259344},
      doi = {https://doi.org/10.22004/ag.econ.259344},
}