Author(s): Samuel Tabot Enow, Sophie Kasse, Jobo Dubihlela
The market depth of an asset has always been an important concept in banking and financial markets because of its connection with hedging and trading cost. From a regulatory perspective, market depth is an important concept for order optimisation where it assist market participants to place their orders in the right direction. Accordingly, the effect of trading volume on market prices have been extensively used as a norm to explore market depth. The objective of this study was to test and validate the price continuity theory of liquidity in order to determine if there are additional variables that could give a more vivid explanation of market depth. Using a panel data spanning over a period of 5 years from May 2016 – May 2021 from the Johannesburg stock exchange and a fixed effect model, the findings revealed that buyer and seller initiated trades are also important variables in explaining market depth. In this regard, this study proposes the price continuity theory as a more comprehensive measure for accessing market depth.