Tracing Contagion Risk : From Crypto or Stock?

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