Modeling systemic risk and dependence structure between cryptocurrency and stock markets using a variational mode decomposition-based copula meth (VMD- Copula)

Mohsi nia, Roghaye; Rezazadeh, Ali; Mohammadzadeh, Yousef; Jahangiri, Shahab

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Modeling systemic risk and dependence structure between cryptocurrency and stock markets using a variational mode decomposition-based copula meth (VMD- Copula)

Roghaye Mohsi nia

, Ali Rezazadeh ^*¹

, Yousef Mohammadzadeh

, Shahab Jahangiri

1- , a.rezazadeh@urmia.ac.ir

Abstract: (144 Views)

The fundamental aim of this study is to investigate the structural dependence between the cryptocurrency and the stock market index. In this study, the total index of Tehran Stock Exchange has been used as a representative of the developing stock market and the index (S&P500) has been used as a representative of the developed stock market. using daily data during the period from 8 August 2015 to 21 February 2023. The results show that there is no structural dependence between the return Bitcoin and Iran stock market , either in the short term or in the long term. In other words, the changes domain in return of Bitcoin during the low and high ranges on the return of the mentioned index are insignificant. The results indicates that the cryptocurrency market is separated from the main class of financial and economic assets and hence offers various benefits to investors. Also, in the long term, for the return of Bitcoin cryptocurrency and the S&P500 stock index, Clayton's copula function was chosen in the first place as the appropriate model to explain the correlation. There is no correlation between the returns of Bitcoin and the s&p500 stock index in the short term. The findings of this study indicate the important role of cryptocurrencies in investors' portfolios as they act as a diversified option for investors and confirm that cryptocurrencies are a new investment asset class. Furthermore, it analyzes the upside and downside risk spillovers between stock markets and the cryptocurrency market by quantifying market risk measures, namely the conditional VaR (CoVaR) and the delta CoVaR (ΔCoVaR). The results indicate that Bitcoin, Ethereum and Ripple cannot be considered a strong hedge during the time of crisis. The speculative nature of cryptocurrencies and risks embedded in Bitcoin, Ethereum, and Ripple increases the risk flow to stock markets during a crisis, thus rendering the hedging costlier. increases the risk flow to stock markets during a crisis, thus rendering the hedging costlier.

Keywords: Cryptocurrencies, Stock market Index, copula function, Variational mode Decomposition, the risk spillovers