Abstract
In this article we investigate the influence that information asymmetry may have on 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. Also, our results suggest that adverse-selection costs, on average, correspond to 10% of the estimated effective spread, indicating an economically significant impact of adverse-selection risk on transaction costs in cryptocurrency markets. Finally, we document that adverse-selection costs are important predictors of intraday volatility, liquidity, market toxicity, and returns.
Original language | English |
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Pages (from-to) | 497-546 |
Journal | Journal of Financial Research |
Volume | 46 |
Issue number | 2 |
DOIs | |
Publication status | Published - 1 Jun 2023 |
Externally published | Yes |
Funding
Ahmet Sensoy gratefully acknowledges support from the Turkish Academy of Sciences ‐ Outstanding Young Scientists Award Program (TUBAGEBIP).
Funders | Funder number |
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Türkiye Bilimler Akademisi |