Liquidity risk and expected cryptocurrency returns

Abstract

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.