Liquidity spillover in cryptocurrency markets

Abstract

This study will investigate the liquidity spillover effects of five cryptocurrencies: Bitcoin, Ether, Binance-coin, Ripple, and Tether. Firstly, the researcher utilizes the Amihud illiquidity ratio to quantify the liquidity performance of the five currencies, which we treat as weekly for the purposes of our study due to data collecting constraints. Secondly, to quantify the liquidity spillover effect in the cryptocurrency market over the period of 2017-2022, the researcher employs Diebold and Yilmaz's spillover index. The results identify the senders and receivers of liquidity spillovers on an individual and pairwise basis for the five major currencies and demonstrate the presence of time variation. Additionally, this paper evaluates the news report-based cryptocurrency uncertainty index (UCRY). This includes the price of cryptocurrencies (UCRY price) and the uncertainty surrounding cryptocurrency policy (UCRY policy). Considering the constructed index follows the same path as the largest cryptocurrency, Bitcoin, it is therefore recommended that the Bitcoin price can be used to forecast the cryptocurrency uncertainty index. Overall, this study has filled a gap in the literature by conducting research on liquidity spillovers in cryptocurrency markets, and it presents some preliminary conclusions. However, in order to verify the validity of our findings and to provide more meaningful results, additional research is required over a longer time horizon and with additional cryptocurrency types.