The effect of dairy futures trading activity on their price volatility: theoretical and methodological issues

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 agricultural futures price volatility and its determinants published in 2008 and later. The analysis of selected literature revealed that there are three main issues for analyzing dairy futures price volatility: a lack of methodology for analyzing nonlinear and non-stationary data of dairy futures trading activity, an insufficient assessment of volatility spillover between dairy and other commodity markets, dairy futures markets compared to other agricultural commodity markets are less liquid and more fragmented. The results of this review not only provide better insights into the peculiarities of dairy futures markets but also specify the requirements for an improved methodology on how to assess dairy futures trading activity and its impact on price volatility.