Title: Volatility and liquidity nexus in cryptocurrency markets
Authors: Angelo Forino - Sapienza University (Italy) [presenting]
Giacomo Morelli - Sapienza University of Rome (Italy)
Abstract: The high fragmentation and weak regulation of cryptocurrency markets make the assessment of their liquidity and volatility difficult, especially at the high frequency. The nexus between liquidity and volatility in cryptocurrency markets is investigated. We propose the logMEM-MIDAS model, which accommodates the LogMEM model within the MIDAS context. This approach overcomes the shortcomings of traditional volatility models, which are inadequate to capture the impact of market liquidity on the volatility. In particular, the information about market liquidity is derived from easy-to-access transaction data through easy-to-compute estimators. We apply the model to real data considering two different cryptocurrency markets. Our findings show strong positive nexus between volatility and liquidity, which supports the perception of cryptocurrencies as speculative investments.