Sentiment matters: the effect of news-media on spillovers among cryptocurrency returns

This paper explores the relationship between news media sentiment and spillover effects in the cryptocurrency market. By employing a time-varying parameter vector autoregressive model, we initially develop measures of spillover specific to individual cryptocurrencies. Subsequently, we employ unique data on cryptocurrency-specific sentiment to assess its impact on these spillover measures using panel fixed effects regression analysis. Our findings indicate that news media sentiment plays a significant role in explaining the spillover dynamics within the cryptocurrency market. Unlike traditional assets, it appears that only positive sentiment affects the spillovers among cryptocurrencies, suggesting an asymmetric effect. Taking into account various characteristics of cryptocurrencies, we find that sentiment's impact on spillover is more pronounced in community-based coins than in those driven by firms. An examination of news content suggests that sentiment pertaining to emotional and risk aspects of cryptocurrencies predominantly influences these spillovers. Additionally, a comparative analysis of sentiment derived from social media and traditional news sources reveals a stronger influence of the former on spillover effects. Through extensive robustness checks, our research consistently affirms the pivotal role of sentiment in driving spillovers among cryptocurrency returns, underlining the importance of sentiment analysis in understanding the dynamics of the cryptocurrency market.