Predictability of return and volatility in Bitcoin markets

Abstract

We study how abnormal liquidity affects the predictive power of returns and volatility in Bitcoin markets. The presence of abnormal liquidity can be explained by price manipulation which is the result from previous studies that found manipulators present in the market. We find that abnormal liquidity has no predictive power for returns but that abnormal liquidity has some predictive power of volatility. We cannot conclude a presence of price manipulators but according to our results regarding volatility there are elements that show irregularities in the markets. Our results further highlight the mechanisms of the market and how traders deal with fees. The results for volatility indicates that the amount of abnormal liquidity have an effect on future volatility which tells us something about how the market is functioning. This study highlights the importance of further exploration of the effects abnormal liquidity has on the Bitcoin market.