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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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    2. 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.

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