Liquidity Contagion and Price Discovery: Evidence from Cryptocurrency Markets

Do exchanges that transmit liquidity shocks also lead price discovery? We examine this question across fragmented cryptocurrency markets using high-frequency limit order book and transaction data. Liquidity contagion is measured through a directed network of lower tail dependence in limit order book depth. We find that stronger liquidity contagion is associated with weaker price discovery after accounting for exchange heterogeneity and common market conditions. The evidence is strongest for contemporaneous specifications and persists under alternative definitions of liquidity contagion, price construction and sampling frequency. Information share provides the most consistent evidence across these alternative measurement choices. The estimates attenuate when sparse systems are excluded, particularly in the most demanding and predictive specifications. The findings suggest that liquidity shock transmission and information leadership capture distinct dimensions of market importance: exchanges that play a central role in propagating adverse liquidity conditions tend to contribute less to permanent price formation.