Trading activity and price behavior in Chinese agricultural futures markets

- Liquidity does not worsen following large order imbalance.
- Contemporaneous returns and order imbalance are strongly positively correlated.
- Order imbalance tends to exacerbate price pressure.
- Chinese futures returns can be predicted using previous day order imbalance-the markets are not resilient to microstructure effects.
- These findings are consistent with the explanation that speculators exhibit herding behavior and make the markets less able to accommodate imbalance.

Using a comprehensive sample of China's agricultural futures from 2010 to 2015, we investigate the relation between trading activities and futures markets liquidity, returns and volatilities. We find that contemporaneous order imbalances are positively related to returns. Order imbalance caused by price pressure lasts more than one day indicating difficulty in absorbing excess buy and sell orders. We also find that lagged order imbalance can predict current returns and that the effect of order imbalance on liquidity is limited. These results are consistent with the explanation that speculative trading not liquidity hinders the Chinese agricultural futures markets to accommodate excess order imbalance.