Concentration and Liquidity Costs in Emerging Commodity Exchanges

Abstract

We analyze the relationships among liquidity costs, volume, and volatility in the Brazilian agricultural futures market, along with the role of market concentration. We estimate a structural three-equation IVÐGMM model using data from Bolsa, Brasil, Balcão corn and live cattle contracts from March 2014 to February 2016. Results show a negative association between liquidity costs and volume and a positive association between liquidity costs and volatility. Market concentration impacts corn and live cattle differently. Concentration contributes to volume reduction for live cattle and to liquidity costs reduction for corn. Our findings shed light on the microstructure of emerging markets.

Keywords

• bid-ask spreads
• volatility
• volume