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Abstract

This paper is the first to study liquidity costs based on actual observed bid-ask spreads (BAS) in commodity futures markets. Using electronically-traded corn futures contracts, we calculate the BAS directly faced by market participants, avoiding estimation problems encountered previously. Over the extended horizon that a contract is traded there exist a pronounced non-linear U-shaped maturity pattern, and a strong seasonality consistent with the term structure of implied volatilities. Statistical analysis in the nearby and next nearby periods, in which most trading activity occurs, indicates that the BAS is generally small (well below two ticks), despite the turbulent market in the 2008 to early 2010 sample period. As in open outcry markets, the BAS responds to daily volume and price volatility, particularly over the last 40 non-expiration month trading days. For the next nearby contracts, a significant declining trend exists in the BAS independent of daily volume and volatility. In both periods, USDA Grain Stock and Production-WASDE announcements significantly widen the BAS, as do short-term price trends. The index fund roll has little impact on the BAS, but contract specific effects are present reflecting a seasonal pattern where the BAS is lowest in December, and highest in September. Week-day effects are relatively weak in magnitude or non-existent.

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