Liquidity Jump, Liquidity Diffusion, and Treatment on Wash Trading of Crypto Assets

ArXiv ID: 2404.07222 “View on arXiv”

Authors: Unknown

Abstract

We propose that the liquidity of an asset includes two components: liquidity jump and liquidity diffusion. We show that liquidity diffusion has a higher correlation with crypto wash trading than liquidity jump and demonstrate that treatment on wash trading significantly reduces the level of liquidity diffusion, but only marginally reduces that of liquidity jump. We confirm that the autoregressive models are highly effective in modeling the liquidity-adjusted return with and without the treatment on wash trading. We argue that treatment on wash trading is unnecessary in modeling established crypto assets that trade in unregulated but mainstream exchanges.

Keywords: cryptoassets, liquidity, wash trading, autoregressive models, crypto exchanges

Complexity vs Empirical Score

• Math Complexity: 4.5/10
• Empirical Rigor: 8.0/10
• Quadrant: Street Traders
• Why: The paper uses established econometric models (ARMA-GARCH) and standard portfolio optimization (Mean-Variance) with relatively accessible mathematics, but it demonstrates strong empirical rigor through detailed treatment of high-frequency crypto data, backtesting portfolio strategies (LAMV vs. TMV), and quantitative analysis of wash trading’s impact on liquidity components.

  flowchart TD
    A["Research Goal: Decompose Liquidity & Model<br>Impact of Wash Trading Treatment"] --> B["Key Methodology: Proposed Liquidity Decomposition<br>into Jump & Diffusion Components"]
    B --> C["Data: Crypto Asset Trades & Liquidity Measures"]
    C --> D{"Computational Processes"}
    D --> E["Analyze Correlation with Wash Trading"]
    D --> F["Apply Treatment on Wash Trading"]
    D --> G["Fit Autoregressive Models on Returns"]
    E --> H["Key Findings: Diffusion correlates more<br>than Jump with Wash Trading"]
    F --> I["Treatment significantly reduces Diffusion,<br>only marginally reduces Jump"]
    G --> J["Autoregressive models remain highly effective<br>post-treatment on mainstream exchanges"]
    H --> K["Conclusion: Treatment unnecessary for<br>established crypto assets on mainstream exchanges"]
    I --> K
    J --> K