The contagion effect: time-varying volatility spillovers between cryptocurrencies and commodities during systemic shocks

Abstract

This study examines the dynamic volatility spillovers between 10 prominent cryptocurrencies and commodities (Brent oil, WTI, and gold), along with the US Dollar Index (USDX), to understand their roles as hedges and safe-haven assets in turbulent market conditions. We examine daily data from January 2018 to April 2024 using two complementary models: the TVP-VAR-DY and the TVP-VAR-BK. The total volatility spillover index shows that spillover effects account for an average of 58.68% of the variation in volatility forecast errors across markets. We demonstrate that major societal shocks, including the great cryptocurrency crash in 2018, the COVID-19 pandemic and the Russia-Ukraine conflict, acted as potent catalysts for financial contagion, with spillovers surging by nearly 84% during the peak of the pandemic. We identify a clear hierarchy of risk transmitters (led by Ethereum and Bitcoin) and receivers (including gold and oil), providing crucial insights for portfolio management. Bitcoin cash, Ethereum, EOS, Monero, Bitcoin, Cardano, and Litecoin serve as net transmitters, while Tether, gold, USDX, Brent oil, Chainlink, WTI (West Texas Intermediate), and Ripple act as net receivers. A key finding with major implications for risk management is that short-term volatility spillovers (65.40%) overwhelm medium- (2.10%) and long-term (1.58%) spillovers, leaving investors with limited time to react during crises. These results offer valuable evidence for financial policymakers and regulators aiming to mitigate systemic risk and enhance the resilience of the global financial system in the face of evolving digital asset classes and recurring global shocks.