Connectedness Between Gold-Backed Cryptocurrencies and the G7 Stock Market Indices During Global Crises: Evidence From the Quantile Vector Autoregression Approach

Abstract

The recent global crises have heightened financial market instability, surging the need for diversification, hedging, and safe haven assets to mitigate stock market risks. This study employs a Quantile Vector Autoregression (Q-VAR) approach to analyze the interconnectedness between gold-backed cryptocurrencies and G7 stock market indices during crises spanning from December 1, 2020, to July 5, 2023. Our findings indicate a robust association between digital gold and financial assets, with a total connectedness index (TCI) of 58.64%. Remarkably, G7 stock indices emerge as significant contributors to market fluctuations compared to digital assets, exerting influence ranging from 24% to 37%, thereby underscoring the potential of gold-backed cryptocurrencies for effective diversification strategies. Dynamic analysis during crises indicates the pivotal role of DGX as a safe haven, alongside identifying NIKKEI as a significant net receiver. Furthermore, the total net directional connectedness examination corroborates the status of gold-backed cryptocurrencies as net receivers, reaffirming their safe-haven abilities. Intriguingly, an in-depth examination across quantiles validates symmetrical dynamic connectedness, with G7 indices predominantly functioning as net transmitters of spillover. Our empirical findings underscore the compelling safe-haven potential in gold-backed cryptocurrencies, offering valuable insights for investors, policymakers, and portfolio optimization during turbulent market conditions.

Keywords

COVID-19 Russia-Ukraine war SVB collapse gold-backed stablecoins G7 stocks quantile-VAR

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