Journal of Banking & Finance Vol. 175 2025
Returns from liquidity provision in cryptocurrency markets
Abstract
We examine the liquidity provision premium in cryptocurrency markets using the returns from the short reversal strategy. We show that returns from liquidity provision can be predicted using the volatility index, realized variance, risk aversion, crash risk, tail risk, and innovations of Tether liquidity. We also find that<br/>an increase in the liquidity provision premium is associated with a decline in liquidity, trading volume, and transaction count, as well as more withdrawals, higher fees, and greater impermanent loss on Uniswap.<br/>This suggests potential competition between centralized and decentralized exchanges. Further, the liquidity provision premium of stock markets in China and Japan positively predicts the premium of cryptocurrency markets (effect of a common shock), meanwhile that of stock markets in the US and Canada negatively predicts the premium of cryptocurrency markets (substitution effect).
- DOI
- 10.1016/j.jbankfin.2025.107411
- Volume
- 175
- Pages
- 107411
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref