A tale of two contracts: Examining the behavior of bid–ask spreads of corn futures in China

Abstract

AbstractContracts that expire in January, May, and September attract the most trading activity for corn futures in China. Contracts that mature in other months are thinly traded, even when they are the closest to maturity. In this paper, we examine and compare the behavior and determinants of the bid–ask spreads (BASs) of active and inactive contracts using the best bid offer data set. We show that both the magnitude and volatility of BAS for inactive contracts exhibit U‐shaped patterns, whereas active contracts' BAS increase only near their expiration. Inactive contracts are also of low liquidity risk after introducing market makers. On the basis of the simultaneous equation model, we find that BAS responds negatively to volume and positively to volatility and order imbalance. The impacts are larger in inactive contracts. Moreover, introducing market makers to inactive contracts is conducive to attracting trading and lowering trading costs.