Spillovers of Investor Sentiment Between Traditional and Cryptocurrency Markets

This study investigates whether investor sentiment originating from traditional stock markets spills over into the cryptocurrency market, specifically focusing on Bitcoin and Ethereum. Drawing upon a global, regionally diverse sample of 23 countries, the research constructs volatility indices (VIX or GARCH-based proxies) to represent investor sentiment across regions and examines their influence on cryptocurrency volatility using the DCC-GARCH model, Johansen cointegration, and VECM frameworks. Contrary to expectations, the DCC-GARCH analysis reveals no statistically significant volatility spillovers from traditional to cryptocurrency markets. However, the cointegration analysis confirms long-term equilibrium relationships in investor sentiment, indicating structural co-movements across markets. Granger causality results show an absence of short-term predictive relationships, with the notable exception of the United States. These findings suggest that while long-run sentiment alignment exists, short-term sentiment transmission remains weak, underscoring the semi-integrated nature of crypto-financial markets. The study offers critical insights for global investors and regulators, highlighting the need to treat cryptocurrencies as partially decoupled from traditional financial sentiment flows, particularly in the short run.