Connectedness and investment strategies of volatile assets: DCC-GARCH R2 analysis of cryptocurrencies and emerging market sectors
Aslam, Adnan; Brahmana, Rayenda Khresna
Authors
Adnan Aslam
Rayenda Khresna Brahmana
Abstract
This study investigates the return propagation dynamics between cryptocurrencies and emerging market sectoral indices (EMSI), focusing on portfolio impact from Bitcoin, Ethereum, and two gold-backed cryptocurrencies (PAXG and X8X). Using data from 2019 to 2024, we apply a novel DCC-GARCH-based R2 decomposed connectedness approach to analyse return connectedness among these high-risk assets. We also utilize innovative concepts such as minimum dynamic pairwise connectedness and minimum R2 decomposed connectedness portfolios in our multivariate hedging portfolios. Our findings reveal that total connectedness is time-variant and influenced by economic events. Bitcoin and Ethereum are identified as net transmitters of shocks, while other assets, particularly gold-backed cryptocurrencies, serve as net shock receivers with minimal impact. Moreover, few EMSIs (financials, industrials, and materials sectors) show significant connectedness in the system. Although our suggested portfolio analysis offers improved returns, none consistently outperform the market. This research offers valuable insights for investors and policymakers regarding the interconnectedness and risk management of cryptocurrencies and EMSI.
Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all
Build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation
Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels
Files
Connectedness and investment strategies of volatile assets: DCC-GARCH R2 analysis of cryptocurrencies and emerging market sectors
(2.7 Mb)
PDF
