Bitcoin Sentiment Index and Asset Classes Connectedness: An International Evidence

Abstract

Investor psychology is one of the determinants of asset pricing, according to behavioral finance. The tool of diversification is used for increase returns and avoid risk. In this study, Bitcoin as a new avenue of investment is explored. The main objective of this study is to measure the effect of Bitcoin investors’ sentiments on the stock market volatility of different countries worldwide, Such an impact is measured through a newly constructed sentiment index for each sample country. Moreover, the interconnectedness of Bitcoin with other financial assets like equity, bonds, foreign exchange, crude oil, and gold commodities is explored through the proxy of BSI(i). For the sample period of 2014 to 2023 on a daily basis, such interconnectedness/spillover effect is measured through Diebold, Francis X.; Yilmaz, (2010a) and heterogeneous frequency responses to shocks is measured through the model given by Baruník & Křehlík, (2018). The results infer that Bitcoin has qualities like other financial assets and commodities. However, like other assets, bitcoin shows low as well as high correlation and spillover with other assets.