Asymmetric volatility transmission in cryptocurrency markets: The role of market capitalization and exogenous shocks

We examine how risk travels between large-cap and small-cap cryptocurrencies and how major news shocks amplify these linkages. Using daily data for nine large-cap/small-cap pairs from September 2018–March 2023, we combine a multivariate volatility model with an event study of eleven major episodes, including the Terra-Luna collapse. Three results emerge. First, volatility transmission runs mainly from large-cap coins to smaller ones: 7 of 9 high-to-low cross-shock coefficients are statistically significant, versus 3 in the opposite direction. Second, negative events trigger larger abnormal returns and more frequent significant post-event effects than positive events, especially among small-cap coins. Third, conditional correlations rise during stress, pointing to stronger market integration and weaker diversification exactly when it matters most. The implied hedge ratios show that short positions in large-cap coins can partly protect small-cap exposure. As cryptocurrency markets mature, monitoring these transmission channels will remain important for portfolio design and for the regulation of systemic digital-asset risk.