New Evidence on Spillovers Between Crypto Assets and Financial Markets
A recent research paper by Roshan Iyer titled “New Evidence on Spillovers Between Crypto Assets and Financial Markets” explores the relationship between cryptocurrency assets and traditional financial markets. The paper analyzes returns and volatility spillovers among a representative set of crypto and financial assets to understand the interconnectedness and potential risks associated with these assets.
The study finds that the magnitude of spillovers increases during periods of heightened turbulence. This can be attributed to negative economic-financial news, specific crypto market events, or exogenous shocks that affect both crypto assets and financial markets. These findings suggest that crypto assets are not isolated from traditional financial markets and are susceptible to external factors.
Interestingly, the research reveals evidence of increasing spillovers over time, with a peak during the COVID-19 pandemic. This implies a growing interdependence between crypto assets and financial markets, which has important implications for investors and policymakers. The findings suggest that as crypto assets become more integrated into the global financial system, their impact on traditional markets becomes more significant.
The research also indicates that crypto assets predominantly transmit spillovers to financial markets. However, there are instances where this relationship is reversed during periods of financial stress. This suggests that crypto assets can act as important conduits for financial market shocks, posing potential risks to financial stability.
The increased correlation during risk-off episodes, such as the COVID-19 pandemic, highlights the need for regulators and policymakers to closely monitor and understand the dynamics between crypto assets and traditional financial markets. As the crypto market continues to evolve and mature, it becomes crucial to assess and mitigate any potential risks that could arise from the interconnectivity between these two sectors.
It is important to note that the study is based on research in progress and aims to stimulate debate and elicit comments. The views expressed in the paper are solely those of the author and do not necessarily represent the views of the International Monetary Fund (IMF), its Executive Board, or IMF management.
In summary, the research provides new insights into the relationship between crypto assets and financial markets. The findings highlight the increasing interdependence and spillover effects between these two sectors, especially during periods of heightened turbulence. The study suggests that crypto assets could serve as important channels for transmitting financial market shocks, posing potential risks to financial stability. These findings emphasize the need for continued research and monitoring of the evolving relationship between crypto assets and traditional financial markets.