The effect of risk appetite and financial stress index on cryptocurrency markets in developing countries

Cryptocurrencies have reached over 502 million users worldwide, serving both as speculative assets and investment instruments. This widespread adoption highlights the importance of examining the impact of macroeconomic variables on cryptocurrency investors' decision-making. The aim of this study is to examine the effect of risk appetite and financial stress index on the cryptocurrency market in developing countries. The sample of the study consists of 23 countries in the Emerging Markets Index determined by Morgan Stanley Capital International (MSCI). The study period consists of monthly data between January 2015 and December 2023. In order to increase the reliability of the analysis, the cryptocurrency market is represented by 5 different coins. The closing prices of Bitcoin (BTC), Ripple (XRP), Docecoin (DCC), Litecoin (LTC) and Ethereum (ETR), which have different technical characteristics and investor base and whose price information can be accessed most comprehensively, constitute the cryptocurrency market data set. In addition, the financial stress index is calculated with the data obtained from the financial markets of each country. As a proxy for risk appetite, the Global Volatility Index (VIX) is included in the analysis. While examining the effect of risk appetite and financial stress index on cryptocurrency markets, S&P500 closing prices, Gold price, Brent oil price, Dow Jones index, MSCI Emerging Market Index were included as control variables in the models in order to obtain more consistent findings. System Generalised Moments (System-GMM) estimator and Seemingly Unrelated Regression (SUR) estimator, which are among the panel data analysis estimators, were used to analyse the data within the scope of the study. As a result of the analysis, it was determined that there is a negative relationship between cryptocurrency prices and the Financial Stress Index (FSE). During periods of stress in the markets, an increase in the financial stress index (FSE) causes a decline in the cryptocurrency market. However, the effect of the volatility index (VIX) is variable, and while Docecoin (DCC), Litecoin (LTC) and Ethereum (ETR) cryptocurrencies depreciate in parallel with the decrease in risk appetite, Bitcoin (BTC) and Ripple (XRP) cryptocurrencies increase due to speculative demand. The impact of these two indices on cryptocurrency markets is very important for investors and regulators. It is an important factor for investors to adopt portfolio diversification as a risk management strategy during periods of financial stress. Analysing the project on which each of the coins traded in the cryptocurrency market is based and diversifying in a way that can minimise the risk of the portfolio in times of sectoral or general crisis are among the factors that protect the investor. Regulatory bodies should develop mechanisms to protect against such fluctuations and prevent liquidity losses in the market. In this context, the preparation of cryptocurrency regulation will ensure that cryptocurrencies have a safer usage area. Although investors diversify their portfolios as a risk management strategy, the preparation of regulations, determining the legal status of cryptocurrencies and strengthening the audit mechanism are of great importance for the protection of investors. However, excessive volatility in cryptocurrency markets increases uncertainty and risk by affecting the stress level in the financial market. The introduction of more transparent and enforceable regulations by regulatory financial institutions can provide market stability by limiting excessive volatility in the market.