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Cover Global Financial Stability Notes
Cryptic Connections: Spillovers between Crypto and Equity Markets
Tara Iyer
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 about their potential financial stability implications. This note examines the extent to which crypto assets have moved to the mainstream by estimating the potential for spillovers between crypto and equity markets in the United States and in emerging markets using daily data on price volatility and returns. The analysis suggests that crypto and equity markets have become increasingly interconnected across economies over time. Spillovers from price volatility of the oldest and most popular crypto asset, 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, while those from its returns have increased by about 8-10 percentage points. Spillovers from the most traded stablecoin, Tether, to these indices have also increased by about 4-6 percentage points. In absolute terms, spillovers from Bitcoin to global equity markets are significant, explaining about 14-18 percent of the variation in equity price volatility and 8-10 percent of the variation in equity returns. These findings suggest that close monitoring of crypto asset markets and the adoption of appropriate regulatory policies are warranted to mitigate potential financial stability risks.
Keywords:
Crypto assets, international financial markets, volatility spillovers, return spillovers, dynamic connectedness, COVID-19, emerging markets, financial stability; crypto asset market; fringe asset class; price volatility; MSCI index; equity price misalignment; credit default swap Index; Virtual currencies; Spillovers; Stock markets; Emerging and frontier financial markets; Financial contagion; Global
Cover Global Financial Stability Notes
Cryptic Connections: Spillovers between Crypto and Equity Markets
Tara Iyer

from equity markets to crypto assets have increased in recent times. Moreover, spillovers in both directions—that is, from crypto assets to equity markets and vice versa—tend to increase during episodes of market volatility. All in all, these findings suggest that crypto assets may no longer be considered as a fringe asset class and could potentially pose financial stability risks due to their extreme price volatility. Thus, regulators and supervisors need to closely monitor action in the crypto markets and the exposure of financial institutions to these assets

Keywords:
equity market indices S&P 500; emerging markets market index; equity index; equity price movement; crypto price spillover
Cover Global Financial Stability Notes
Front Matter
Tara Iyer

Title Page MONETARY AND CAPITAL MARKETS Global Financial Stability Notes Cryptic Connections: Spillovers between Crypto and Equity Markets No. 2022/01 Prepared by: Tara Iyer January 2022 DISCLAIMER : The views expressed are those of the author and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 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

Keywords:
Virtual currencies; Stock markets; Emerging and frontier financial markets; Global