The Influence of Virtual Currency Development and Investor Attention on Financial Stocks' Value : Evidence from Selected Asian Equity Markets

Ang, Ming Torng (2022) The Influence of Virtual Currency Development and Investor Attention on Financial Stocks' Value : Evidence from Selected Asian Equity Markets. Masters thesis, Tunku Abdul Rahman University College.

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Abstract

The development of virtual currencies has advanced and people are now investing and incorporating virtual currencies into their investment portfolios to diversify their risks. In addition, some fund management companies treat virtual currencies as negotiable securities and include them as part of their portfolios to reduce systematic risks, increase portfolio performance and spread risks and it has been proven that this investment strategy results in a much more efficient portfolio. Hence, virtual currencies offer an investment opportunity for investors who are looking for diversification. At the same time, virtual currencies have spillover effects on the stock markets, especially on the financial stocks. In order to identify how virtual currencies development actually impact the financial stocks’ return, this study aims to examine the influence of virtual currency development on financial stocks’ value and the moderating role of investor attention on this relationship. This research is conducted based on all available financial firms in four selected countries in the Asia for the period of 2016 to 2020. Among the selected countries, Malaysia and Philippines are regarded as countries which recognise the legitimacy of virtual currencies, whereas Indonesia and Vietnam are the countries which do not recognise the legitimacy of virtual currencies. The pooled ordinary least squares method is used in this research to carry out the analyses. Based on the findings on this study, it is concluded that changes in virtual currency values have greater effects on the values of financial stocks in countries which do not recognise the legitimacy of virtual currencies than in countries which do. Specifically, changes in Bitcoin values have a more significant negative spillover effect on stock markets which lack breadth and depth since these countries do not recognise the legitimacy of virtual currencies. Moreover, this study also shows that investor attention has a greater moderating effect on the relationship between virtual currency values and financial stocks’ values in countries which do not recognise the legitimacy of virtual currencies than in the countries which do. Precisely, the results demonstrate that the interaction between Bitcoin values and investor attention creates a significant negative impact on the financial stocks’ value in countries which do not recognise the legitimacy of virtual currencies. Several important implications can be drawn from the findings of this study. First, policy makers can develop appropriate capital market and monetary policies to control the spillover effects from the virtual currency markets to the stock markets as well as manage investor sentiments to stabilise the stock markets. Besides, listed financial firms should monitor the developments of virtual currencies closely to prevent any adverse spillovers from these markets to the stock markets. Last but not least, portfolio managers and individual investors should formulate their investment strategies and rebalance their portfolios in a timely manner if there is a sudden spike in attention on virtual currencies.