Responses to market information and the impact on price volatility and trading volume: the case of Class III milk futures

Under the intraday microstructure framework, we analyze the impact of traders’ responses to market information on daily futures price and trading activity by utilizing the unique features of the Class III milk futures contract. The cash settlement and classified pricing scheme distinguish milk futures from those of other commodities. We construct two variables, days to maturity and price deviates, to capture the distinctive features. While the number of days to maturity indicates the length of time before cash settlement in the maturity month, price deviates reflects traders’ aggregate responses to weekly announced information on milk prices. A structural price volatility–trading volume model is specified and estimated using the Bayesian Markov chain Monte Carlo method. The results confirm that (1) the closer to cash settlement, the lower milk price volatility, which is different from the typical “Samuelson effect” for other commodity futures, and (2) both price variability and trading volume increase with traders’ responses to market information and therefore are positively associated.