The Crypto Cycle and US Monetary Policy
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Summary:
We examine fluctuations in crypto markets and their relationships to global equity markets and US monetary policy. We identify a single price component—which we label the “crypto factor”—that explains 80% of variation in crypto prices, and show that its increasing correlation with equity markets coincided with the entry of institutional investors into crypto markets. We also document that, as for equities, US Fed tightening reduces the crypto factor through the risk-taking channel—in contrast to claims that crypto assets provide a hedge against market risk. Finally, we show that a stylized heterogeneous-agent model with time-varying aggregate risk aversion can explain our empirical findings, and highlights possible spillovers from crypto to equity markets if the participation of institutional investors ever became large.
Series:
Working Paper No. 2023/163
Subject:
Blockchain and DLT Financial cycles Financial markets Financial regulation and supervision Financial sector policy and analysis Market risk Stock markets Technology Virtual currencies
Frequency:
regular
English
Publication Date:
August 4, 2023
ISBN/ISSN:
9798400245411/1018-5941
Stock No:
WPIEA2023163
Format:
Paper
Pages:
57
Please address any questions about this title to publications@imf.org