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Liquidity risk and expected cryptocurrency returns

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  • Wei Zhang
  • Yi Li

Abstract

This paper examines how liquidity risk is priced in the cross‐section of cryptocurrency returns. In doing so, we use the Amihud measure as a liquidity proxy. By employing the univariate portfolio analysis, the bivariate portfolio analysis, and the Fama‐MacBeth regression analysis, we document a negative relationship between liquidity and cryptocurrency returns. Additional tests demonstrate that this finding is robust to alternative liquidity measurement as well as size screens and show no evidence of a significant intertemporal relationship between liquidity and expected returns for three leading cryptocurrencies. Our conclusions add to the understanding of how markets price cryptocurrencies.

Suggested Citation

  • Wei Zhang & Yi Li, 2023. "Liquidity risk and expected cryptocurrency returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 472-492, January.
    • Handle: RePEc:wly:ijfiec:v:28:y:2023:i:1:p:472-492
    DOI: 10.1002/ijfe.2431
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    Cited by:

    1. Zhao, Xiaojuan & Wang, Ye & Liu, Weiyi, 2024. "Someone like you: Lottery-like preference and the cross-section of expected returns in the cryptocurrency market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    2. Dunbar, Kwamie & Owusu-Amoako, Johnson, 2023. "Predictability of crypto returns: The impact of trading behavior," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    3. Milan Fičura, 2023. "Impact of size and volume on cryptocurrency momentum and reversal," FFA Working Papers 5.003, Prague University of Economics and Business, revised 05 Apr 2023.
    4. Cakici, Nusret & Shahzad, Syed Jawad Hussain & Będowska-Sójka, Barbara & Zaremba, Adam, 2024. "Machine learning and the cross-section of cryptocurrency returns," International Review of Financial Analysis, Elsevier, vol. 94(C).
    5. Adam Baybutt, 2024. "Empirical Crypto Asset Pricing," Papers 2405.15716, arXiv.org.
    6. Boyi Li & Weixuan Xia, 2024. "Crypto Inverse-Power Options and Fractional Stochastic Volatility," Papers 2403.16006, arXiv.org, revised Sep 2024.
    7. Kim, Jinhwan & Cho, Hoon & Seok, Sangik, 2023. "Liquidity risk, return performance, and tracking error: Synthetic vs. Physical ETFs," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).

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