The effect of diary futures trading activity on their price volatility: literature review

Abstract

Dairy futures price volatility plays an important role in dairy farmers' risk management as well as dairy commodities price discovery. Trading activity as a factor for agricultural futures price volatility has been studied extensively since the emerge of commodity index traders followed by commodity markets becoming more volatile in the last decade. However, the majority of research papers investigate major cereal future contracts whereas the research on dairy futures is not yet analyzed. The aim of this review is to present the current situation in the research of dairy futures trading activity effect on their price volatility, focusing on methodological progress and related issues. This review provides a comparative analysis of empirical research articles on dairy futures price volatility and its determinants published in 2005 and later. Dairy futures markets compared to other agricultural commodity markets were less liquid and more fragmented, however, they likewise experienced a significant price volatility and seasonality during observed time periods. High price volatility was especially present in cash settled butter futures. Even though there is an indication among selected studies that trading activity correlate with price volatility, this should be supplemented by an analysis of causal relationships. Therefore, a further research on dairy futures should provide necessary tools to measure the exact effect of trading activity on price volatility in order to provide better insights on using dairy futures as an effective means for managing price risk in dairy sector.

Comovement of dairy product futures and firm value: returns and volatility

“…Investors include a wide range of private economic actors seeking to trade in dairy or dairy products and manage their price risk, such as dairy farmers and dairy processing firms, and other third parties seeking to speculate on commodity price and stock price movements, such as investment companies. Investors' decisions are influenced by the expected returns and expected volatility of futures and equities markets, as they seek to maximise returns and minimise risk (Staugaitis 2019). Therefore, an understanding of the cross-market relationship between dairy product futures and dairy stocks, in terms of returns and volatility, may help guide investors on achieving their goals moving forward.…”

An EM/MCMC Markov-Switching GARCH Behavioral Algorithm for Random-Length Lumber Futures Trading

“…The reason for using these factors relates to several works that suggest the main market factors for pricing in agricultural futures [54,57,60,61].…”