How to Measure the Liquidity of Cryptocurrencies?
24 Pages Posted: 1 Jan 2020
Date Written: December 13, 2019
We use data from cryptocurrency markets to analyze the accuracy of liquidity measures that are calculated from transactions data. We use benchmark measures calculated from high-frequency order book data to evaluate the performance of the transactions-based measures along three dimensions, the time-series correlation with the benchmark measures, the root mean squared and mean absolute error, and the liquidity ranking across three exchanges. The Abdi & Ranaldo (2017) estimator best captures the time series variation in liquidity. It also performs well in the cross-sectional dimension. When it comes to estimating the level of the benchmark measures the Kyle & Obizhaeva (2016) estimator and the Amihud (2002) illiquidity ratio perform best.
Keywords: cryptocurrencies, liquidity, horse race
JEL Classification: G12, G14
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