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- Title
Adverse selection in cryptocurrency markets.
- Authors
Tiniç, Murat; Sensoy, Ahmet; Akyildirim, Erdinc; Corbet, Shaen
- Abstract
In this article we investigate the influence that information asymmetry may have on future volatility, liquidity, market toxicity, and returns within cryptocurrency markets. We use the adverse‐selection component of the effective spread as a proxy for overall information asymmetry. Using order and trade data from the Bitfinex exchange, we first document statistically significant adverse‐selection costs for major cryptocurrencies. Also, our results suggest that adverse‐selection costs, on average, correspond to 10% of the estimated effective spread, indicating an economically significant impact of adverse‐selection risk on transaction costs in cryptocurrency markets. Finally, we document that adverse‐selection costs are important predictors of intraday volatility, liquidity, market toxicity, and returns.
- Subjects
CRYPTOCURRENCIES; TRANSACTION costs; MARKETING costs; INFORMATION asymmetry; LIQUIDITY (Economics)
- Publication
Journal of Financial Research, 2023, Vol 46, Issue 2, p497
- ISSN
0270-2592
- Publication type
Article
- DOI
10.1111/jfir.12317