State-Dependent Relationship Between Cryptocurrency Returns and Credit Spreads

This study investigates how overconfident cryptocurrency traders influence the connection between returns and risk premia, proxied by option-adjusted credit spreads. Using daily data from January 2021 to February 2025, we uncover asymmetry and state dependence: returns decline when spreads widen, particularly during crashes, yet they do not recover when spreads narrow. Equity indices exhibit more balanced co-movements. The asymmetry strengthens in high-volatility periods and persists after we control for broad market returns and after we substitute a composite crypto index for individual cryptocurrencies. These findings indicate a distinctive pricing mechanism in cryptocurrency markets shaped by overconfident behaviour and credit-spread dynamics.