Trading volume and liquidity provision in cryptocurrency markets

Bianchi, Daniele and Babiak, Mykola and Dickerson, Alexander (2022) Trading volume and liquidity provision in cryptocurrency markets. Journal of Banking and Finance, 142: 106547. ISSN 0378-4266

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We provide empirical evidence within the context of cryptocurrency markets that the returns from liquidity provision, proxied by the returns of a short-term reversal strategy, are primarily concentrated in trading pairs with lower levels of market activity. Empirically, we focus on a moderately large cross section of cryptocurrency pairs traded against the U.S. Dollar from March 1, 2017 to March 1, 2022 on multiple centralised exchanges. Our findings suggest that expected returns from liquidity provision are amplified in smaller, more volatile, and less liquid cryptocurrency pairs, where fear of adverse selection might be higher. A panel regression analysis confirms that the interaction between lagged returns and trading volume contains significant predictive information for the dynamics of cryptocurrency returns. This is consistent with theories that highlight the roles of inventory risk and adverse selection for liquidity provision.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Banking and Finance
Additional Information:
This is the author’s version of a work that was accepted for publication in Journal of Banking and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Banking and Finance, 142, 106547, 2022 DOI: 10.1016/j.jbankfin.2022.106547
Uncontrolled Keywords:
?? liquidity provisionshort-term reversaltrading volumeempirical asset pricingadverse selectionfinanceeconomics and econometrics ??
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Deposited On:
20 Jun 2022 10:20
Last Modified:
13 Jun 2024 01:56