Political-related Meme coins trigger the heterogeneity fluctuation spillover effect in the crypto market.

##Study on the Impact of Politically Connected Tokens on the Crypto Assets Market

Recently, the journal Economics Letters published a research article titled "From Zero to Hero: Memecoins' Spillover Effects in Cryptocurrency Markets". The study analyzes the event of a well-known political figure issuing a Meme Token, revealing the heterogeneous volatility spillover effects driven by market sentiment and fundamentals. The research found that political signals amplified speculative dynamics, highlighting the increasingly important role of political factors in shaping the Crypto Assets market and investor behavior.

###Introduction

The impact of political dynamics on financial markets is becoming increasingly significant, and the Crypto Assets market has become an important area where politics and finance intersect. The 2024 U.S. presidential election further highlights this relationship, with a prominent presidential candidate turning to support digital assets, claiming to make the U.S. the "global capital of cryptocurrency," and placing Crypto Assets at the core of their economic agenda. As a result, the market anticipates a more favorable policy stance during their potential term.

These were validated on January 18, 2025. The candidate issued the official Meme coin on the Solana blockchain. Within just 24 hours, the coin's price skyrocketed by 900%, with a trading volume reaching $18 billion, and a market cap exceeding $4 billion over the then-largest Meme coin DOGE. The next day, the issuance of another Meme coin related to its family members further fueled market speculation.

These events are not only speculative in nature but also constitute a significant exogenous shock, the effects of which extend beyond the realm of financial speculation, while simultaneously signaling broader regulatory and political agendas.

This study aims to examine how this event simultaneously acts as a political signal and a financial event affecting the Crypto Assets market. The research focuses on three key questions:

1. How does the release of this Meme Token affect the returns and volatility of major Crypto Assets?
2. Did this event trigger a financial contagion effect within the Crypto Assets market?
3. Does this impact exhibit heterogeneity, manifesting as different Crypto Assets responding differently based on their technological foundations, uses, or speculative appeal?

To answer these questions, the research employs the Baba-Engle-Kraft-Kroner (BEKK) multivariate generalized autoregressive conditional heteroskedasticity (MGARCH) model, which is particularly suitable for analyzing the dynamic relationship between volatility and correlation over time.

The study selected the top ten crypto assets by market capitalization for empirical analysis, finding that after the release of the Meme coin, there was a significant volatility spillover effect among crypto assets, indicating the presence of financial contagion in the market. The event triggered a major shift in market dynamics, with Solana and Chainlink recording the largest gains due to their infrastructure and strategic connections. Mainstream crypto assets such as Bitcoin and Ethereum showed strong resilience, with their Cumulative Abnormal Returns (CARs) and variance stabilizing in the later stages of the event. In contrast, other Meme coins like Dogecoin and Shiba Inu experienced depreciation, with funds likely shifting towards the newly issued Meme coins.

In fact, the issuance of this Meme coin took place against the backdrop of significant political polarization in the United States, with the relevant political figures closely associated with strong political sentiments, thereby increasing investor sensitivity and exacerbating market reactions. For some investors, the endorsement by this political figure symbolizes a unique speculative opportunity, giving rise to a strong "herding effect"; while other investors, aware of the political and regulatory risks due to the controversial image, adopt a more cautious stance. This polarization explains the observed high volatility and differentiated market responses—from enthusiasm for expected political support to skepticism regarding reputation and political uncertainty.

In recent years, the contagion effect in the Crypto Assets market has increasingly attracted attention due to its significant implications for financial stability, risk management, and portfolio diversification. Existing research mainly focuses on the spillover between Crypto Assets themselves or the spillover between Crypto Assets and traditional financial assets, revealing patterns of connectivity, contagion risk, and volatility transmission. However, most of these studies primarily consider financial or technical triggers, such as market crashes, liquidity constraints, or blockchain innovations. Political signals, especially the contagion mechanisms related to politically connected Tokens, remain a research gap.

This study is the first paper to analyze the impact of politically connected tokens on the Crypto Assets market. It expands the understanding of how political narratives influence decentralized financial markets. Furthermore, unlike previous research that often focused on negative shocks, this study concentrates on the effects of positive shocks driven by political signals on the market. Notably, there is evidence suggesting that positive shocks have an even greater impact on the volatility of Crypto Assets than negative shocks. Ultimately, this study provides important references for academia, practitioners, and policymakers, revealing the heterogeneity of market responses to politically connected tokens and emphasizing how asset characteristics affect the dynamics of financial contagion.

###Data and Methods

####2.1 Data and Sample Selection

This study used proprietary data of closing mid-prices per minute, covering the most representative 10 of the top 20 Crypto Assets by market capitalization: Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Solana (SOL), Dogecoin (DOGE), Chainlink (LINK), Avalanche (AVAX), Shiba Inu (SHIB), Polkadot (DOT) and Litecoin (LTC). The data comes from a centralized trading platform in the United States, obtained from the LSEG Tick History database.

The dataset contains 20,160 observations, covering the period from January 11, 2025, to January 25, 2025, including a symmetrical time frame one week before and after the release of the Meme Token on January 18, 2025, to facilitate comparative analysis before and after the event.

The formula for calculating yield is as follows:

Yield = ln(Pt / Pt-1)

Among them, Pt represents the price of the digital asset at time t.

The event time is defined as January 18, 2025, at 2:44 AM Coordinated Universal Time (UTC), which is the point at which the new Meme Token was officially announced for release. Cumulative Abnormal Returns (CARs) are used to assess the information cascade effect by calculating the average benchmark return for each Crypto Asset from January 1, 2025, to January 10, 2025, and then subtracting this benchmark from the actual returns during the sample period to derive the excess returns over the market benchmark, which are then accumulated to obtain CARs.

####2.2 Method

The study uses the BEKK-MGARCH model to analyze the impact of the launch of Meme coin on the crypto assets market. It is assumed that the logarithmic returns follow a normal distribution with a mean of zero and a conditional covariance matrix of Ht, and the model is set as follows:

!7384155

Among them, H represents the unconditional covariance matrix. The parameter matrix satisfies a,b>0, and a+b<1, to ensure the stability and positive definiteness of the model. Then, the contagion effect test is conducted, using a relatively strict significance level of α=0.001.

###Result

####3.1 Volatility Spillover Effect

Preliminary analysis results reveal the interrelationships between Crypto Assets. After the event occurred, the interconnectivity between assets significantly increased, supporting the hypothesis that "the event triggered a volatility spillover effect." The volatility of the stationary log returns increased, reflecting a rise in market instability and a faster adjustment speed. The returns of various Crypto Assets experienced significant fluctuations during this event, highlighting the systemic impact of this occurrence.

!7384156

The dynamic conditional covariance results estimated by the BEKK-MGARCH model indicate that the event indeed triggered financial contagion and volatility spillover effects in the Crypto Assets market. The covariance coefficients in the later stages of most events are significant at the 0.001 level, especially between assets such as ETH, SOL, and LINK, where the covariance significantly increased, demonstrating stronger interdependence and a higher degree of market integration. Although SHIB and DOT also reached a significance level of 0.01, their impact is weaker. The covariance of LTC and XRP actually decreased after the event, indicating that the spillover effects are not uniformly distributed among all assets. Overall, the results highlight the structural impact of this Meme Token issuance event on the entire Crypto Assets market.

####3.2 information cascading effect

Cumulative Abnormal Returns (CARs) analysis further reveals the information cascade effects triggered by the issuance of Meme coins. The results indicate that the event has a significant structural impact on market dynamics, manifested as asset-specific response patterns and increased volatility.

In the pre-event phase, most crypto assets experienced positive returns, possibly driven by speculative expectations or market optimism regarding potential political changes. This indicates that even in the absence of conclusive information, investors have exhibited significant speculative buying behavior, consistent with the widely documented "fear of missing out" characteristic in the crypto assets market.

After the event, three key dynamics emerged:

1. SOL has performed excellently, surpassing all other assets, which is likely related to its direct technological relationship as a new Meme coin-bearing blockchain.

2. LINK has also performed strongly, possibly related to its association with large tech companies in the United States.

3. Mature crypto assets such as Bitcoin, Ethereum, Ripple, and Litecoin have gradually stabilized after experiencing a moderate increase, reflecting their market resilience and relative insulation from cascading speculative impacts.

At the same time, DOGE and other Meme coins like SHIB appear particularly weak, showing a clear asset substitution effect, where speculative funds are shifting from old Meme coins to newly issued Tokens. Although AVAX and DOT have solid technical foundations, they have also not been immune to this trend of capital transfer, showing signs of value loss.

!7384157

The research findings clearly demonstrate how the issuance of new Meme Tokens as an exogenous shock disrupted the pre-event market co-movement pattern. Before the event, there was a high degree of synchronized volatility among the various assets; however, after the event, the CARs of different assets showed significant divergence, ranging from +20% for Solana to −20% for Dogecoin and Shiba Inu.

These findings reveal that asset-specific narratives, technological relevance, and investors' subjective perceptions can significantly amplify the differential responses of asset returns during major information shocks.

!7384158

###Conclusion

This study examines the impact of cryptocurrency issuance related to political figures on the crypto market, focusing on the analysis of volatility spillover effects and information cascades.

Research results indicate that the market's reaction to this event shows significant heterogeneity. For example, SOL benefited significantly due to its direct technical association with the new Meme coin. Additionally, assets sharing the same underlying blockchain infrastructure also received a boost by hitching a ride on this event.

At the same time, mainstream Crypto Assets such as Bitcoin and Ethereum have shown stronger stability due to their core position in the market, playing a similar anchoring role in this event and stabilizing the overall market structure. This indicates that investor sentiment is no longer solely dependent on basic technical factors, but is also significantly influenced by geopolitical and policy narratives, especially when these narratives are issued by highly symbolic leaders.

!7384159

In summary, this article reveals the high sensitivity of the Crypto Assets market to external events and its tendency to be driven by speculative behavior. As digital assets increasingly intertwine with political and economic issues, continuous monitoring of this interaction becomes particularly important for understanding the stability of the market.

![qXf6cU1ckd4GnwT3KVoWmv71ckX3PE5aOI5V93hL.png]( "7384160