Spillover and connectedness dynamics of precious metals, cryptocurrencies and green assets under climate risk

Abstract

The Diebold and Yilmaz (2012) and Baruník and Křehlík (2018) are two complementary models used in this study to examine the transmission of volatility spillover among the five precious metals (gold, silver, platinum, palladium, and rhodium); the top five cryptocurrencies (bitcoin, ethereum, tether, ripple, and binance coin); two green equities (NASDAQ OMX green energy and S&P global clean energy indexes); and two physical and transition climate risk indexes (PRI and TRI). The analysis spans daily data from January 2018 to December 2023, covering multiple crises. One key contribution is offering new insights into asset interactions with transition and physical climate risks based on textual analysis established by Bua et al. (2024). We conclude that volatility spillovers explain 40.3% of market uncertainty. The largest transmitters include ethereum (72.17%), bitcoin (64.65%), silver (52.42%), and XRP (49.18%), while TRI and PRI also play considerable roles. Ethereum, bitcoin, silver, XRP, rhodium, and clean energy emerged as net transmitters, while palladium, TRI, PRI, USDT, gold, BNB, the green economy, and platinum act as net receivers. Short-term spillovers (39.15%) dominate medium-term (18.27%) and long-term (20.88%), implying that short-term shocks pose greater risks to investors. The climate-related risks demonstrate distinct transmission mechanisms, with transition risks (TRI) responding to broad market movements while physical risks (PRI) propagate through more specialized channels. Our study suggests that investors should closely monitor cryptocurrencies and green assets in the short term, approach gold and stablecoins with caution in the medium term, and consider long-term allocations to rhodium and clean energy assets.