Is liquidity risk priced in cryptocurrency markets?

Abstract

This paper investigates the pricing of liquidity risk in the cross-section of cryptocurrencies from January 2017 to December 2020. The cryptocurrencies with high liquidity risk (beta) earned a risk-adjusted return of 4.4% higher weekly than those with low liquidity risk after controlling for the market, size, and reversal factors. Furthermore, the positive relation between expected cryptocurrency returns and liquidity risk is robust when I use cross-sectional regression tests for individual cryptocurrencies and alternative liquidity measures. The results suggest that liquidity risk is an important determinant of expected cryptocurrency returns.