The study investigates the effect of investor fear on cryptocurrency crash risk, with emphasis on overall market sentiment and COVID-19-related fear. It also evaluates the relative performance of Google search-based measures compared to the economic policy uncertainty (EPU) index and the volatility indexes (VIX) as benchmark indicators of uncertainty.
This study employs a quantitative empirical approach to examine the impact of investor fear on cryptocurrency price crash risk. Investor sentiment is proxied using the FEARS index derived from Google search volumes and the coronavirus fear index. Crash risk is measured using negative conditional skewness of weekly returns and down-to-up volatility. The analysis is based on weekly data for the top 10 cryptocurrencies from August 2010 to October 2021. Regression models are used to examine the relationship between investor fear and crash risk and to compare the explanatory power of Google-based fear indicators with traditional uncertainty measures.
The results show that investor fear significantly increases the risk, while COVID-19-related fear further intensifies this effect, highlighting the vulnerability of crypto markets during periods of heightened uncertainty. Moreover, Google-based fear indicators outperform the EPU index and the VIX in explaining and predicting crash risk. Overall, the findings suggest that investor attention and sentiment are more powerful drivers of cryptocurrency crash risk than traditional volatility-based measures.
This study links investor fear, including COVID-19 sentiment, to cryptocurrency crash risk and finds that Google-based fear indicators outperform traditional measures like the EPU index and the VIX in predicting market downturns.
