Time-varying nexus and causality in the quantile between Google investor sentiment and cryptocurrency returns

Abstract

Understanding the interplay between investor sentiment and cryptocurrency returns has become a critical area of research. Indeed, this study aims to uncover the role of Google investor sentiment on cryptocurrency returns (including Bitcoin, Litecoin, Ethereum, and Tether), especially during the 2017–18 bubble (January 01, 2017, to December 31, 2018) and the COVID-19 pandemic (January 01, 2020, to March 15, 2022). To achieve this, we use two techniques: quantile causality and wavelet coherence. First, the quantile causality test revealed that investors’ optimistic sentiments have notably higher cryptocurrency returns, whereas pessimistic sentiments have significantly opposite effects. Moreover, the wavelet coherence analysis shows that co-movement between investor sentiment and Tether cannot be considered significant. This result supports the role of Tether as a stablecoin in portfolio diversification strategies. In fact, the findings will help investors improve the accuracy of cryptocurrency return forecasts in times of stressful events and pave the way for enhanced decision-making utility.