{
  "title": "Cryptic Connections: Spillovers between Crypto and Equity Markets",
  "publication": "Global Financial Stability Notes, January 11, 2022",
  "sourceUrl": "https://www.imf.org/en/publications/global-financial-stability-notes/issues/2022/01/10/cryptic-connections-511776",
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  "summary": "Crypto assets have emerged as an increasingly popular asset class among retail and institutional investors. Although initially considered a fringe asset class, their increased adoption across countries—in emerging markets, in particular—amid bouts of extreme price volatility has raised concerns abou",
  "sections": [
    {
      "heading": "Overview and scope",
      "content": "- Examines the extent to which crypto assets have moved to the mainstream by estimating potential spillovers between crypto and equity markets in the United States and in emerging markets.\n- Uses daily data on price volatility and returns to measure connectedness and spillovers.\n- Focus on Bitcoin (the oldest and most popular crypto asset) and Tether (the most traded stablecoin), and their relationships with the S&P 500 and MSCI emerging markets indices."
    },
    {
      "heading": "Key empirical findings",
      "content": "- Crypto and equity markets have become increasingly interconnected across economies over time.\n- Spillovers from price volatility of Bitcoin to the S&P 500 and MSCI emerging markets indices have increased by about 12-16 percentage points since the onset of the COVID-19 pandemic.\n- Spillovers from Bitcoin returns to these indices have increased by about 8-10 percentage points since the onset of the COVID-19 pandemic.\n- Spillovers from Tether to these indices have increased by about 4-6 percentage points since the onset of the COVID-19 pandemic.\n- In absolute terms, spillovers from Bitcoin to global equity markets:\n  - Explain about 14-18 percent of the variation in equity price volatility.\n  - Explain about 8-10 percent of the variation in equity returns."
    },
    {
      "heading": "Interpretation and implications",
      "content": "- The magnitude and increase in spillovers indicate that crypto markets are no longer fully isolated from mainstream equity markets, including in emerging markets.\n- Given the significant share of equity volatility and returns explained by Bitcoin, crypto asset movements can materially affect broader financial market dynamics.\n- Increased interconnectedness, especially during and after the COVID-19 pandemic, heightens the potential for transmission of extreme price volatility across asset classes and borders."
    },
    {
      "heading": "Policy recommendations and monitoring",
      "content": "- Close monitoring of crypto asset markets is warranted to detect and assess evolving spillover dynamics.\n- Adoption of appropriate regulatory policies is recommended to mitigate potential financial stability risks arising from increased crypto–equity market connectedness.\n\nSource: Global Financial Stability Notes — \"Cryptic Connections: Spillovers between Crypto and Equity Markets\" (Tara Iyer, January 11, 2022).\n\n---\n\n Content in this bundle\n\n- Cryptic Connections: Spillovers between Crypto and Equity Markets\n  - Cryptic Connections: Spillovers between Crypto and Equity Markets (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Cryptic Connections: Spillovers between Crypto and Equity Markets (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/global-financial-stability-notes/issues/2022/01/10/cryptic-connections-511776"
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    "Authors: Tara Iyer",
    "Published: January 11, 2022",
    "Series: Global Financial Stability Notes",
    "DOI: https://doi.org/10.5089/9781616358068.065",
    "Examines the extent to which crypto assets have moved to the mainstream by estimating potential spillovers between crypto and equity markets in the United States and in emerging markets.",
    "Uses daily data on price volatility and returns to measure connectedness and spillovers.",
    "Focus on Bitcoin (the oldest and most popular crypto asset) and Tether (the most traded stablecoin), and their relationships with the S&P 500 and MSCI emerging markets indices.",
    "Crypto and equity markets have become increasingly interconnected across economies over time.",
    "Spillovers from price volatility of Bitcoin to the S&P 500 and MSCI emerging markets indices have increased by about 12-16 percentage points since the onset of the COVID-19 pandemic.",
    "Spillovers from Bitcoin returns to these indices have increased by about 8-10 percentage points since the onset of the COVID-19 pandemic.",
    "Spillovers from Tether to these indices have increased by about 4-6 percentage points since the onset of the COVID-19 pandemic.",
    "In absolute terms, spillovers from Bitcoin to global equity markets:",
    "The magnitude and increase in spillovers indicate that crypto markets are no longer fully isolated from mainstream equity markets, including in emerging markets.",
    "Given the significant share of equity volatility and returns explained by Bitcoin, crypto asset movements can materially affect broader financial market dynamics.",
    "Increased interconnectedness, especially during and after the COVID-19 pandemic, heightens the potential for transmission of extreme price volatility across asset classes and borders.",
    "Close monitoring of crypto asset markets is warranted to detect and assess evolving spillover dynamics.",
    "Adoption of appropriate regulatory policies is recommended to mitigate potential financial stability risks arising from increased crypto–equity market connectedness.",
    "**Cryptic Connections: Spillovers between Crypto and Equity Markets**"
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