Bitcoin Sentiment and Financial Asset Connectedness: Evidence from Global Markets using FEVD

Abstract

This study examines the influence of investor psychology on asset pricing within financial markets, with a focus on Bitcoin as a distinctive investment opportunity. It aims to quantify the interdependence of the constructed Bitcoin sentiment index with various financial assets, including stocks, bonds, the USDX, crude oil, and gold. The research also investigates the main transmitter and receiver of shocks in the financial market. This study employs the OLS regression model and the Forecast Error Variance Decomposition method by Diebold and Yilmaz (2012) to analyse daily data from January 1, 2014, to May 30, 2023. The findings suggest that the Bitcoin Sentiment has shown significant interconnectedness with other financial assets. However, Crude oil mainly transmits shocks, while the USDX is the primary shock receiver in various countries. However, Bitcoin sentiment is the primary transmitter in India, Argentina, the Philippines, China, and Pakistan, and the stock market is the leading receiver of the shocks in these countries. Moreover, the crude oil market has a significant influence on other sample financial markets. These findings are crucial for investors, policymakers, and portfolio managers in developing effective short- and long-term diversification strategies.