Rights statement: 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
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Final published version
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
}
TY - JOUR
T1 - Trading volume and liquidity provision in cryptocurrency markets
AU - Bianchi, Daniele
AU - Babiak, Mykola
AU - Dickerson, Alexander
N1 - 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
PY - 2022/9/30
Y1 - 2022/9/30
N2 - 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.
AB - 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.
KW - Liquidity provision
KW - short-term reversal
KW - trading volume
KW - empirical asset pricing
KW - adverse selection
U2 - 10.1016/j.jbankfin.2022.106547
DO - 10.1016/j.jbankfin.2022.106547
M3 - Journal article
VL - 142
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
M1 - 106547
ER -