Insomnia is highly prevalent and a major risk factor for depression. Its most consistently reported characteristic is chronic hyperarousal, resembling enduring emotional distress. Understanding its cause would provide opportunities to develop better treatment and prevention of depression. Given recent insights in the role of rapid eye-movement (REM) sleep in emotion regulation, it was hypothesized that fragmented REM sleep interferes with the overnight resolution of emotional distress, contributing to its accumulation which shows as hyperarousal. Participants (N=1,199) completed questionnaires on insomnia, hyperarousal, nocturnal mental content—an indicator of restless REM sleep—and emotional distress after experiencing shame, a relevant self-conscious emotion in psychiatry. Structural equation analyses investigated whether restless REM sleep contributed to hyperarousal by leaving emotional distress unresolved.