How do emotions drive market dynamics? A tale of spillovers in cryptocurrency markets

This paper studies emotional spillovers in cryptocurrency markets and the associated impacts on market performance. By constructing a dynamic connectedness network, we capture the emotional spillover effects among the major cryptocurrencies and their time-varying evolution. We then quantify how the emotional spillovers of cryptocurrencies drive their market performance within a joint distributional framework that gauges the heterogeneity of such a linkage under different conditions of emotions and market performance of cryptocurrencies. Our results indicate that within emotional spillovers, cryptocurrencies act as the net information receiver, while carbon-intensive (dirty) cryptocurrencies play a greater role in driving emotional spillovers than eco-friendly (clean) ones. The stock market, being controlled by the emotional system, is found to be the major net provider. From a dynamic perspective, clean cryptocurrencies are shown to have stronger emotional spillover effects than dirty cryptocurrencies prior to the COVID-19 pandemic, and the effects of both gradually weaken thereafter. The role of emotional spillovers in driving market performance is often more pronounced under extreme market conditions in cryptocurrency markets.