Bianchi, Daniele, Babiak, Mykola and Dickerson, Alexander (2022) Trading volume and liquidity provision in cryptocurrency markets. Journal of Banking & Finance, 142 . 106547. doi:10.1016/j.jbankfin.2022.106547 ISSN 0378-4266.

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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 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 role of inventory risk and adverse selection for liquidity provision.

Item Type:	Journal Article
Divisions:	Faculty of Social Sciences > Warwick Business School
SWORD Depositor:	Library Publications Router
Journal or Publication Title:	Journal of Banking & Finance
Publisher:	Elsevier Science BV
ISSN:	0378-4266
Official Date:	26 May 2022
Dates:	Date Event September 2022 UNSPECIFIED 26 May 2022 Available 17 May 2022 Accepted
Volume:	142
Article Number:	106547
DOI:	10.1016/j.jbankfin.2022.106547
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access

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