Returns and volume: Frequency connectedness in cryptocurrency markets

The present paper investigates the causal link between returns and volume in cryptocurrency markets. Relative to earlier empirical studies on the topic, it employs a flexible methodological approach that allows the intensity and the pattern of the link to vary with the traders’ planning horizon (shorter vs longer runs) and the nature of the preceding price shocks (positive vs negative). Causality is bi-directional implying that: (a) volume-based technical analysis can lead to higher profits and (b) trend-following is likely to be a common investment strategy among rational uninformed traders. There is, therefore, scope for establishing appropriate disclosure systems to deal with information asymmetry and the risk associated with it. In the longer-run, spillovers from returns to volume are stronger than those in the opposite direction. The same, generally, applies to spillovers from positive relative to negative returns. Consequently, returns (especially the positive ones) are more likely to induce fundamental changes in traders’ expectations compared to volume.