Microstructure Noise and Realized Variance in the Live Cattle Futures Market

16 Pages Posted: 21 Apr 2020

See all articles by Anabelle Couleau

Anabelle Couleau

Universidad EAFIT

Teresa Serra

University of Illinois at Urbana-Champaign

Philip Garcia

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Date Written: March 2019

Abstract

Recently, U.S. live cattle futures prices have experienced high levels of intraday price variance, which have raised concerns about the possible impact of microstructure noise from high frequency trading on market instability. This article identifies both the magnitude and the duration of the bias caused by market microstructure noise in measuring efficient price variance in the live cattle futures market from 2011 to 2016, with emphasis on price variance behavior in recent years. Market microstructure noise increases observed price variance, but its effects are not large and do not last more than three to four minutes in response to changing information. Intraday price variance has increased in recent years, but the findings provide little evidence that high frequency traders were responsible for economically meaningful market noise. Informatively, steps taken by the CME and cattle producers to mitigate noise have not been fruitful to date, and signal that the magnitude of noise will likely vary with the magnitude of changes in demand and cyclical supply.

Keywords: Live cattle, futures, microstructure noise, realized variance, integrated variance

Suggested Citation

couleau, anabelle and Serra, Teresa and Garcia, Philip, Microstructure Noise and Realized Variance in the Live Cattle Futures Market (March 2019). American Journal of Agricultural Economics, Vol. 101, Issue 2, pp. 563-578, 2019, Available at SSRN: https://ssrn.com/abstract=3578915 or http://dx.doi.org/10.1093/ajae/aay052

Anabelle Couleau (Contact Author)

Universidad EAFIT

Carrera 49 N° 7 sur – 50
Bogotá, Antioquia 00000
Colombia

Teresa Serra

University of Illinois at Urbana-Champaign

601 E John St
Champaign, IL 61820
United States

Philip Garcia

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

1301 W. Gregory Drive
427 Mumford Hall
Urbana, IL 61801
United States
217-333-0644 (Phone)
217-333-5538 (Fax)

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