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Volatility and Depth in Commodity and FX Futures Markets

Alexandre Aidov () and Olesya Lobanova ()
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Alexandre Aidov: College of Business, University of Houston-Victoria, Victoria, TX 77901, USA
Olesya Lobanova: College of Business, University of Houston-Victoria, Victoria, TX 77901, USA

JRFM, 2021, vol. 14, issue 11, 1-16

Abstract: Prior theory suggests a positive relation between volatility and market depth, while past empirical research finds contrasting results. This paper examines the relation between the volatility and the limit order book depth in commodity and foreign exchange futures markets during a turbulent time using the generalized method of moments (GMM). Results indicate a negative relation between volatility and depth and suggest that the depth in the limit order book decreases as volatility increases. Findings help to understand how market participants provide liquidity in response to shifts in prices.

Keywords: market depth; volatility; futures market (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
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