What determines bitcoin liquidity? A penalized regression approach

We investigate which factors contribute most to the liquidity of Bitcoin, using a diverse universe of candidate factors reflecting key developments in the crypto market and the global economy. The empirical analysis relies on three regularized linear regression methods, viz. LASSO, adaptive LASSO, a...

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Bibliographic Details
Published in:Applied economics letters 2023-10, Vol.30 (18), p.2543-2554
Main Author: Ahmed, Walid M.A.
Format: Article
Language:English
Subjects:
adaptive LASSO
Bitcoin
Candidates
Digital currencies
Economic analysis
elastic net
Global economy
LASSO
Liquidity
liquidity determinants
Volatility
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Summary:We investigate which factors contribute most to the liquidity of Bitcoin, using a diverse universe of candidate factors reflecting key developments in the crypto market and the global economy. The empirical analysis relies on three regularized linear regression methods, viz. LASSO, adaptive LASSO, and elastic net. We also apply a cross-fit partialing-out LASSO instrumental-variables regression model, as a supplementary approach to handle endogeneity. Findings reveal that trading volume and realized volatility of Bitcoin, cryptocurrency hacks, Ethereum liquidity, and public attention are the most common drivers of liquidity, irrespective of the penalized regression approach and liquidity proxy adopted. Our evidence confirms the paramountcy of cryptocurrency-specific factors over global economic and financial ones in influencing Bitcoin liquidity.
ISSN:1350-4851
1466-4291
DOI:10.1080/13504851.2022.2099793