Navigating volatility spillover amidst investor extreme fear in stablecoin and financial markets

Alicia Ti and Zaäfri Ananto Husodo

Cogent Economics & Finance, 2024, vol. 12, issue 1, 2408276

Abstract: Investor sentiment has the potential to serve as a predictive factor for cryptocurrency assets, yet its impact on volatility spillover across markets remains uncertain. This research investigates the influence of investor sentiment classification on the volatility spillover from stablecoins to conventional financial markets. Empirical findings reveal the role of stablecoins as net volatility receivers from financial assets during extreme fear sentiment conditions, suggesting that stablecoins may function as a potential safe-haven when investors experience significant fear, offering insights to investors and portfolio managers regarding the potential use of stablecoins as a risk mitigation tool within an investment portfolio.Stablecoins play a pivotal role in stabilizing financial markets, particularly during periods of extreme fear and volatility. Using advanced modeling, the analysis uncovers how stablecoins act as critical safe-haven assets, absorbing shocks from both cryptocurrency and traditional markets. This ability to cushion volatility provides investors with a powerful tool for risk mitigation, especially in times of market turbulence. The findings not only highlight stablecoins' growing relevance in portfolio management but also offer key insights for policymakers looking to enhance the resilience of financial systems. By bridging the gap between digital and conventional assets, stablecoins are shown to be vital in maintaining liquidity and market stability, making them essential instruments for navigating both speculative and traditional investment landscapes.

Date: 2024
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DOI: 10.1080/23322039.2024.2408276

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