Abstract
With the exponential growth of digital currencies in recent times and the integration of them into investment portfolios by investors and asset managers, it has become imperative to understand the potential spillover and network connectedness between digital currencies and other financial markets. In this study, with the use of the Diebold & Yilmaz (2014) methodology, we analyse the directional return spillover and directional return network connectedness between the digital currency market, the traditional currency market and the stock market. We analyse this from a viewpoint of investigating potential differences between a developed economy and an emerging economy, USA and South Africa respectively, while also considering different time horizons namely, a short-term cyclical view and a long-term trend view. We consider Bitcoin, Ethereum and Ripple as our digital currencies, the All-Share Index and S&P 500 as our stock market indices and the USDZAR and US Dollar Index as our traditional currency measures. The data sample selected is from 10 November 2017 to 09 September 2022 to data availability and the importance to assess how the cross-transmission fares during the COVID-19 crisis. We find that in our network, digital currencies, namely Ethereum and Bitcoin, contribute the most to total return spillover, across the different time horizons, but mainly between themselves, while the traditional currency and stock market contributed very little in comparison with the shorter-term contributions for both economies, being slightly higher than the longer-term. In comparison between the two economies, in the longer-term, we find that the traditional currency and stock market in the emerging economy contribute more to total return spillover than the developed economy. However, in the shorter-term and the level set, the stock market for the developed economy contributes considerably more than the emerging economy stock market, while the traditional currencies are fairly similar. To validate our results, we also perform robustness tests. This study’s results provide vital insights for investors, asset managers and policymakers to allow for educated and informed decision-making, moving forward.
Keywords: Spillover, Digital Currency, Return Connectedness, Asset Managers, Stock Market, Currency Market, Emerging Economy, Developed Economy.