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Abstract

Recent years have witnessed growing presence of intra-day large price movements in corn futures market. This paper focuses on the behavior of bid-ask spread, a gauge for the cost of immediacy, during various large price movements featuring dramatic price decline/increase in a short time period in corn futures market, from 2014 to 2017. We specify a vector autoregressive model (VAR) to model the dynamics in the top of the book and use impulse response functions (IRFs) to examine the dynamic behavior of the spread. Our results reveal a resilient spread which is expected to narrow substantially within 5 – 20 seconds and completely revert back to normal state within 15 - 40 seconds once being shocked to widen. Along with the small average magnitude of bid-ask spread, our results suggest that corn futures market does not appear to experience significant liquidity deterioration over highly volatile periods, and that traders and hedgers who demand immediate execution can expect to do so at a reasonably and consistently low cost throughout the large price movement horizon.

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