Contagion from crypto exchange hacks: Wealth effect or portfolio rebalancing?

Abstract

This study explores the contagion mechanism from the cryptocurrency market to stock markets of 30 countries with the highest Bitcoin trading volumes, focusing on cyberattacks targeting cryptocurrency exchanges. We identify investor-induced contagion through the wealth effect as the primary transmission channel, which intensifies over time. In contrast, contagion driven by portfolio rebalancing, particularly evident in Asian markets, tends to gradually weaken. The wealth effect is initially amplified during periods of consecutive cyberattacks, but this impact diminishes as investors gradually adapt to repeated negative shocks. Individual cyberattacks do not significantly increase the co-exceedance probability of stock returns, but consecutive attacks within one week significantly amplify it.