Cryptocurrency returns and the volatility of liquidity

In this paper I document a positive relation between the volatility of liquidity and expected returns. Specifically, I analyze the relationship between the idiosyncratic volatility of market liquidity and the returns of the five largest cryptocurrencies by market capitalization. I find that the correlation between liquidity volatility and returns is overall significantly positive, but highly time-varying. This implies that investors demand a premium for a high variation in liquidity volatility. I furthermore find that the correlation between returns and the level of liquidity is mostly positive, thus, when liquidity is low, expected returns are high. The results corroborates results from other financial markets.