Asymmetric dynamics between geopolitical conflict sentiment and cryptomarkets

Abstract

This study investigates the influence of Russia-Ukraine war and associated economic sanctions sentiments on the returns of cryptocurrencies, NFTs, and DeFi assets. We analyse daily returns of twelve blockchain-based assets by employing quantile-on-quantile regression (QQR) and an asymmetric time-varying parameter vector autoregression (TVP-VAR) connectedness approach. The QQR reveals that the war sentiment has varying effects on the returns of digital assets, with negative (positive) impacts in bullish (bearish) markets. Notably, there is a heterogeneous effect observed in normal market conditions. Results from the TVP-VAR-based asymmetric connectedness approach demonstrate a time-varying influence of war sentiment, particularly heightened post-invasion. The war sentiment emerges as a significant transmitter (receiver) of price shocks in bullish (bearish) market conditions. These findings offer extensive implications for investors and policymakers when modelling market behavior during geopolitical events.