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Adverse selection in cryptocurrency markets

TiniƧ, M.
Sensoy, A.
Akyildirim, Erdinc
Corbet, S.
Publication Date
2023-06
End of Embargo
Supervisor
Rights
© 2023 The Southern Finance Association and the Southwestern Finance Association. This is the peer reviewed version of the following article: Tiniç M, Sensoy A, Akyildirim E et al (2023) Adverse selection in cryptocurrency markets. The Journal of Financial Research. Accepted for Publication., which has been published in final form at https://doi.org/10.1111/jfir.12317. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Peer-Reviewed
Yes
Open Access status
openAccess
Accepted for publication
11/01/2023
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Awarded
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Abstract
This paper investigates the influence that information asymmetry may possess upon the 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. Our results also suggest that adverse selection costs, on average, correspond to ten percent of the estimated effective spread, indicating an economically significant impact of adverse selection risk on transaction costs in cryptocurrency markets. We finally document that adverse selection costs are important predictors of intraday volatility, liquidity, market toxicity, and returns.
Version
Accepted manuscript
Citation
TiniƧ M, Sensoy A, Akyildirim E et al (2023) Adverse selection in cryptocurrency markets. The Journal of Financial Research. 46(2): 497-546.
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Article
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