What drives the volatility of non-fungible tokens (NFTs): macroeconomic fundamentals or investor attention?

ABSTRACT

Non-fungible tokens (NFTs) have experienced wild market fluctuation during the past years, which leads to the high volatility of NFT’s daily price. This paper examines two potential volatility drivers of NFTs: macroeconomic fundamentals and investor attention. We employ the global and local economic policy uncertainty (EPU) indices as the economic fundamentals’ proxies. The investor attention is represented by the Google search volumes (GSV) or NFTs attention index. Based on the empirical results of a modified generalized autoregressive conditional heteroskedasticity –mixed-data sampling (G-M) model, we find that either economic fundamentals or investor attention can increase the volatility of NFTs significantly. The monthly global EPU index adjusted by the current GDP and weekly GSV contain complementary information. Macroeconomic fundamentals and investor attention can jointly model the volatility of NFTs better than considering only one explanatory variable, as suggested by the G-M model with two explanatory variables. The results remain robust to alternative Twitter-based EPU indices and the ongoing COVID-19 pandemic period.

KEYWORDS:

• Non-fungible token
• volatility
• macroeconomic fundamentals
• investor attention
• generalized autoregressive conditional heteroskedasticity–mixed-data sampling model

JEL CLASSIFICATION:

• G10
• E32
• G14

Acknowledgements

This work was supported by the National Natural Science Foundation of China (72103082).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ https://dune.com/hildobby/NFTs.

² https://www.policyuncertainty.com/global_monthly.html.

³ More precisely, the group of words is a combination of the following keywords: ‘NFT’, ‘Non-fungible token’, ‘Decentraland’, ‘Cryptopunk’, and ‘Cryptokitties’.

⁴ https://sites.google.com/view/cryptocurrency-indices/the-indices/nfts-attention. The technical details on the NFTsAI can be found in the Appendix A.

Additional information

Funding

The work was supported by the National Natural Science Foundation of China [72103082]