“Volatility Spillover” in crypto markets describes the phenomenon where a significant price fluctuation or heightened volatility in one cryptocurrency asset or market segment transmits to others. This indicates inherent interconnectedness and can trigger broader market movements across the digital asset landscape.
Mechanism
This typically occurs through several channels, including algorithmic trading systems reacting across correlated assets, shifts in investor sentiment, or cross-margining requirements on exchanges. For example, a sharp price movement in Bitcoin might rapidly influence altcoin prices or the collateral values within decentralized finance (DeFi) protocols.
Methodology
Systems architects and institutional investors analyze volatility spillover to assess systemic risk, optimize portfolio diversification, and refine risk management strategies. By quantifying these interdependencies, models can better predict cascading liquidations or market contagions, allowing for proactive adjustments to trading positions and capital allocation within the complex crypto investment landscape.
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