Quantifying the impact of Terra-LUNA collapse on financial markets: evidence from event study approach

Purpose The present study aims to examine the impact of the collapse of one of the major cryptocurrency ecosystems, the Terra-LUNA crash, on the financial markets worldwide. To fully comprehend the impact of the crash, the study separately examines the response of equity markets, the cryptocurrency market (including stablecoins), fiat currencies, precious metals and the energy market. Design/methodology/approach Using the daily closing prices of equity markets (G7 countries), cryptocurrencies, fiat currencies, precious metals and energy market commodities extracted from www.investing.com, the authors employed the market model of event study methodology.

Findings We found a long-lasting negative impact of the event on the overall cryptocurrency market, as reflected by a substantial −14.272% cumulative average abnormal return (CAAR) during the (−4, +10) event window. However, stablecoins remained relatively stable with insignificant abnormal returns. In addition, equity markets initially experienced negative average abnormal return (ARR) on the event day, but they swiftly rebounded.

Notably, the positive reactions observed in the fiat money market suggest potential opportunities and strategies amid market disruptions. The precious metal market and energy market remained relatively unaffected. Originality/value To the best of the authors’ knowledge, the present study is the first attempt to quantify the impact of the Terra-LUNA crash on different financial markets using event study methodology.

The findings contribute to discussions about financial stability and regulatory frameworks, with implications for policymakers and market participants.