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Volatility and Liquidity in Cryptocurrency Markets—The Causality Approach

In: Contemporary Trends and Challenges in Finance

Author

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  • Barbara Będowska-Sójka

    (Poznań University of Economics and Business)

  • Tomasz Hinc

    (OLX Group)

  • Agata Kliber

    (Poznań University of Economics and Business)

Abstract

The dependency between volatility and liquidity is thoroughly examined in the contemporary literature on the financial markets. Especially, on the stock markets, liquidity tends to evaporate when volatility increases. Still, very few papers examine such relationships within the cryptocurrency markets. In this paper, we verify whether the volatility and liquidity of cryptocurrencies are interrelated. Our sample consists of 12 highly capitalized and traded cryptocurrencies. We consider both daily and weekly liquidity measures and thus extend the set of proxies. In order to examine the dependency between cryptocurrencies, the causality approach is employed. We use an asymmetric causality test to separate the influence of growths and declines of volatility to the changes of liquidity direction and the other way around. Overall, the empirical results indicate, inter alia, that high volatility is a Granger cause to high liquidity, which means that high volatility attracts investors and induce higher interest in the new financial instruments.

Suggested Citation

  • Barbara Będowska-Sójka & Tomasz Hinc & Agata Kliber, 2020. "Volatility and Liquidity in Cryptocurrency Markets—The Causality Approach," Springer Proceedings in Business and Economics, in: Krzysztof Jajuga & Hermann Locarek-Junge & Lucjan T. Orlowski & Karsten Staehr (ed.), Contemporary Trends and Challenges in Finance, pages 31-43, Springer.
    • Handle: RePEc:spr:prbchp:978-3-030-43078-8_3
    DOI: 10.1007/978-3-030-43078-8_3
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    Cited by:

    1. Klender Cortez & Martha del Pilar Rodríguez-García & Samuel Mongrut, 2020. "Exchange Market Liquidity Prediction with the K-Nearest Neighbor Approach: Crypto vs. Fiat Currencies," Mathematics, MDPI, vol. 9(1), pages 1-15, December.

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