Dissecting the Terra-Luna Crash: Evidence from the Spillover Effect and Information Flow

Abstract

The Terra-LUNA crash in May 2022 was triggered by the depeg of the ecosystem’s stablecoin UST. It led to the unprecedented demise of a blockchain ecosystem and cost investors tens of billions of dollars. We examined the impact of the Terra-LUNA crash on the cryptocurrency market. Based on the hourly return and realized volatility from April 2022 to May 2022, we used the spillover index and effective transfer entropy to configure the interlinkage change between cryptocurrency markets. We conclude that the Terra-LUNA crash had a significant impact on the connectedness of the cryptocurrency market, investor attention, and market sentiment.

Keywords: Terra, LUNA, UST, Spillover effect, Effective transfer entropy, Information flow