Price Discovery in Thinly Traded Futures Markets: How Thin is Too Thin?

Philipp Adämmer, Martin T. Bohl, Christian Gross
2015 Journal of futures markets  
It is still an unanswered question how much trading activity is needed for efficient price discovery in commodity futures markets. For this purpose, we investigate the price discovery process of two thinly traded agricultural futures contracts traded at the European Exchange in Frankfurt. Our empirical results show that the trading volume threshold which is necessary to facilitate efficient price discovery is very low. As our findings are based on constant and time-varying vector error
more » ... n models, we also show that neglecting time-variation in the parameters can lead to misleading results, especially for thinly traded markets. JEL Classification: G12, G13, Q14
doi:10.1002/fut.21760 fatcat:uj7pvgbqrfbhjiayxngqpliqqe