Tracing Contagion Risk: From Crypto or Stock?

Abstract

The increasing crypto-stock comovement has spurred concerns over digital assets’ ripple effects and systemic risks. We closely examine this comovement and report two findings. First, the crypto-stock correlation hovered around zero before March 2020 but increased strikingly after. This shift appears to be fueled by the Federal Reserve’s policy response to the COVID-19 pandemic. Second, we find little evidence of crypto shocks being transmitted to stock but observe significant volatility spillovers in reverse. Further evidence links the increased crypto-stock comovement post-COVID to a growing presence of institutional investors in the crypto markets, whose trades are sensitive to monetary policy changes.

Keywords: Cryptocurrency, COVID-19 Pandemic, Federal Reserve, Interest Rate, Spillover

JEL Classification: E44, E52, E58, G18, G23