Trading volume and liquidity provision in cryptocurrency markets

42 Pages Posted: 13 Sep 2018 Last revised: 20 Jun 2022

See all articles by Daniele Bianchi

Daniele Bianchi

School of Economics and Finance, Queen Mary University of London

Alexander Dickerson

Warwick Business School

Mykola Babiak

Lancaster University Management School

Date Written: August 24, 2019

Abstract

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 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.

Keywords: Liquidity provision, short-term reversal, trading volume, empirical asset pricing, adverse selection.

JEL Classification: G12, G17, E44, C58

Suggested Citation

Bianchi, Daniele and Dickerson, Alexander and Babiak, Mykola, Trading volume and liquidity provision in cryptocurrency markets (August 24, 2019). Available at SSRN: https://ssrn.com/abstract=3239670 or http://dx.doi.org/10.2139/ssrn.3239670

Daniele Bianchi (Contact Author)

School of Economics and Finance, Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

HOME PAGE: http://whitesphd.com

Alexander Dickerson

Warwick Business School ( email )

University of Warwick
Coventry, Warwickshire CV4 7ES
United Kingdom

Mykola Babiak

Lancaster University Management School ( email )

Department of Accounting and Finance
Lancaster University Management School
Lancaster, LA1 4YX
United Kingdom
+44 (0) 7512 209090 (Phone)

HOME PAGE: http://sites.google.com/site/mykolababiak/home

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