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Adverse selection in cryptocurrency markets

Tiniç, Murat; Sensoy, Ahmet; Akyildirim, Erdinc; Corbet, Shaen

Authors

Murat Tiniç

Mr AHMET SENSOY Ahmet.Sensoy2@nottingham.ac.uk
Postgraduate Teaching Assistant (PGTA)

Shaen Corbet



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.

Citation

Tiniç, M., Sensoy, A., Akyildirim, E., & Corbet, S. (2023). Adverse selection in cryptocurrency markets. Journal of Financial Research, 46(2), 497-546. https://doi.org/10.1111/jfir.12317

Journal Article Type Article
Acceptance Date Aug 23, 2022
Online Publication Date Jan 30, 2023
Publication Date Jun 5, 2023
Deposit Date Oct 24, 2024
Publicly Available Date Jan 31, 2025
Print ISSN 0270-2592
Electronic ISSN 1475-6803
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 46
Issue 2
Pages 497-546
DOI https://doi.org/10.1111/jfir.12317
Keywords Cryptocurrencies; Market Microstructure; Adverse Selection; Informed Trading JEL: G12, G14, G15, C51 * Kadir Has University, Faculty of Management, Kadir Has Caddesi, 34083 Fatih Istanbul, Turkey
Public URL https://nottingham-repository.worktribe.com/output/40584826
Publisher URL https://onlinelibrary.wiley.com/doi/10.1111/jfir.12317