Dance with the devil? The nexus of fourth industrial revolution, technological financial products and volatility spillovers in global financial system

In the age of the Fourth Industrial Revolution, cryptocurrencies have emerged as a marvel of technological financial products, and a global phenomenon with a profound potential for societal welfare, while also posing new risks and uncertainties. This study examines the presence, nature, and magnitude of one such category of risk - return and volatility spillovers that are originated in the cryptocurrency market, and transmitted into the global financial system. We use the data of cryptocurrencies and traditional asset global indices from January 2018 to March 2020. We employ Baba-Engle-Kraft-Kroner (BEKK) parameterization, in order to estimate the return and volatility spillovers; and our results provide interesting insights. We find that in case of an initial shock in the crypto market, the spillover effect is felt by all the financial markets; while the reverse is not true. The GARCH parameters, however, show that once the shock is incorporated, then only the equity and high yield hedged bond markets show persistence to the subsequent volatility spillovers originated in the crypto market. Moreover, equity and bonds markets are also creating great persistence in the volatility of cryptos, suggesting that the latter is mostly a recipient of the volatility spillovers, rather than the originator.

Automated summary

This study examines the risk of return and volatility spillovers originating in the cryptocurrency market and transmitted into the global financial system. Initial shocks in the crypto market affect all financial markets, with equity and high yield hedged bond markets showing persistence to subsequent volatility spillovers. This suggests that cryptocurrencies are mainly recipients, rather than originators, of volatility spillovers from traditional financial markets.