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Returns from liquidity provision in cryptocurrency markets

Author

Listed:
  • Farag, Hisham
  • Luo, Di
  • Yarovaya, Larisa
  • Zieba, Damian

Abstract

We examine the liquidity provision premium in cryptocurrency markets using the returns from the short reversal strategy. We show that returns from liquidity provision can be predicted using the volatility index, realized variance, risk aversion, crash risk, tail risk, and innovations of Tether liquidity. We also find that an increase in the liquidity provision premium is associated with a decline in liquidity, trading volume, and transaction count, as well as more withdrawals, higher fees, and greater impermanent loss on Uniswap. This suggests potential competition between centralized and decentralized exchanges. Further, the liquidity provision premium of stock markets in China and Japan positively predicts the premium of cryptocurrency markets (effect of a common shock), meanwhile that of stock markets in the US and Canada negatively predicts the premium of cryptocurrency markets (substitution effect).

Suggested Citation

  • Farag, Hisham & Luo, Di & Yarovaya, Larisa & Zieba, Damian, 2025. "Returns from liquidity provision in cryptocurrency markets," Journal of Banking & Finance, Elsevier, vol. 175(C).
    • Handle: RePEc:eee:jbfina:v:175:y:2025:i:c:s0378426625000317
    DOI: 10.1016/j.jbankfin.2025.107411
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    More about this item

    Keywords

    Liquidity Provision; Cryptocurrency; Uncertainty;
    All these keywords.

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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