The Crypto-Equity Nexus: A Novel Simulation of Risk Transmission Channels

Abstract

Abstract Introduction of cryptocurrency markets offered unique confidentiality and hedging benefits to investors, since they have been rapidly integrated into the financial system through forming substantial long- and short-term interdependencies with equity markets. Previous studies present contradicting and ambigious conclusions about the financial contagion between the equity and crypto markets, nonetheless they do not adequately pose light on the impacts of global events on the relationship between these markets. To address these concerns, this research examines the volatility spillovers between the equity and Decentralized Finance (DeFi) markets through simulating the dependencies with the aim of eliminating the bias and drawbacks of the traditional models by appling an optimized and original analytical framework composed of Deep Neural Network (DNN) and Time Varying Parameters Vector Auto Regression (TVP-VAR) models. Results identify substantial transmission from Bitcoin (BTC), Nasdaq 100 (NASDAQ), Shanghai Stock Exchange (SSE), and New York Stock Exchange (NYSE) to BNB, Euronext, Tether (TET), and Ethereum (ETH) and reflect the significant impact of the global important events on the financial spillovers. Model assessment results confirm the robust accuracy, fitness, reliability, and validity of the model, as well as the success of key parameter optimization.