Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/272870 
Year of Publication: 
2022
Series/Report no.: 
Sveriges Riksbank Working Paper Series No. 413
Publisher: 
Sveriges Riksbank, Stockholm
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.
Subjects: 
Liquidity provision
short-term reversal
trading volume
empirical asset pricing
adverse selection
JEL: 
G12
G17
E44
C58
Document Type: 
Working Paper

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