Adverse Selection in Cryptocurrency Markets

49 Pages Posted: 4 Aug 2022

See all articles by Murat Tiniç

Murat Tiniç

Kadir Has University

Ahmet Şensoy

Bilkent University

Erdinc Akyildirim

affiliation not provided to SSRN

Shaen Corbet

Dublin City University ; University of Waikato - Management School

Date Written: July 06, 2022

Abstract

This paper investigates the influence that information asymmetry may possess upon the future volatility, liquidity, market toxicity, and returns within cryptocurrency markets. We use the adverse selection component of the effective spread as a proxy for overall information asymmetry. Using order and trade data from the Bitfinex Exchange, we first document statistically significant adverse selection costs for major cryptocurrencies. Our results also suggest that adverse selection costs, on average, correspond to ten percent of the estimated effective spread, indicating an economically significant impact of adverse selection risk on transaction costs in cryptocurrency markets. We finally document that adverse selection costs are important predictors of intraday volatility, liquidity, market toxicity, and returns.

Keywords: Cryptocurrencies, Market Microstructure, Adverse Selection, Informed Trading

JEL Classification: G12, G14, G15, C51

Suggested Citation

Tiniç, Murat and Şensoy, Ahmet and Akyildirim, Erdinc and Corbet, Shaen, Adverse Selection in Cryptocurrency Markets (July 06, 2022). Available at SSRN: https://ssrn.com/abstract=4175306 or http://dx.doi.org/10.2139/ssrn.4175306

Murat Tiniç (Contact Author)

Kadir Has University ( email )

Istanbul
Turkey

Ahmet Şensoy

Bilkent University ( email )

06533 Bilkent, Ankara
Turkey

Erdinc Akyildirim

affiliation not provided to SSRN

Shaen Corbet

Dublin City University ( email )

Dublin 9
Ireland

University of Waikato - Management School ( email )

Hamilton
New Zealand

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