On the dynamic relationship between transaction volume and returns: evidence from the cryptocurrency market

Abstract

Purpose Using vector autoregressive modelling (VAR) and Granger causality tests, this paper attempts to empirically investigate the dynamic relationship between return and volume of transactions of two main cryptocurrencies: Bitcoin and Ethereum. Design/methodology/approach Based on a generalized autoregressive conditional heteroskedasticity (GARCH) model with a transaction volume parameter in the conditional volatility equation. Findings The results provide empirical evidence of a positive contemporaneous relationship between the variation in transaction volume and the daily return of Bitcoin and Ethereum. The results also show that the conditional volatility of the returns is affected by the past volatility, which implies weak-form inefficiency for both Bitcoin and Ethereum markets. The results of the VAR model, testing Granger causality, indicate that the volume of transactions Granger-Causes Bitcoin and Ethereum returns. Furthermore, the findings show a Granger causal relation from returns to volume. Originality/value This result suggests that cryptocurrency returns can predict transaction volumes and vice versa.