Measuring Price Discovery between Nearby and Deferred Contracts in Storable and Non-Storable Commodity Futures Markets

TL;DR

This paper analyzes how price discovery occurs between nearby and deferred futures contracts in storable (corn) and non-storable (live cattle) markets, revealing differences in dominance and influencing factors.

Contribution

It introduces a comparative analysis of price discovery dynamics in storable versus non-storable commodity futures markets using intraday data and new measures.

Findings

Nearby contracts dominate price discovery in corn but less so in live cattle.

Price discovery share declines below 50% volume share about 2-3 weeks before expiry in corn.

Trading volume is the most influential factor affecting price discovery share.

Abstract

Futures market contracts with varying maturities are traded concurrently and the speed at which they process information is of value in understanding the pricing discovery process. Using price discovery measures, including Putnins (2013) information leadership share and intraday data, we quantify the proportional contribution of price discovery between nearby and deferred contracts in the corn and live cattle futures markets. Price discovery is more systematic in the corn than in the live cattle market. On average, nearby contracts lead all deferred contracts in price discovery in the corn market, but have a relatively less dominant role in the live cattle market. In both markets, the nearby contract loses dominance when its relative volume share dips below 50%, which occurs about 2-3 weeks before expiration in corn and 5-6 weeks before expiration in live cattle. Regression results indicate that the share of price discovery is most closely linked to trading volume but is also affected, to far less degree, by time to expiration, backwardation, USDA announcements and market crashes. The effects of these other factors vary between the markets which likely reflect the difference in storability as well as other market-related characteristics.