Dynamic connectedness between modern investment assets and equity markets: portfolio hedging strategies

This study investigates the dynamic connectedness between modern investment assets (MIAs) and stock markets to determine whether the inclusion of MIAs enhances portfolio risk diversification. The study employs a TVP-VAR model to analyze the connectedness between MIAs and stock markets over the period 2020 to 2024, and calculates spillovers, hedge ratios, and portfolio weights. The findings indicate moderate static connectedness, with dynamic spillovers fluctuating over time, reflecting the impact of geopolitical tensions on markets. The US and German stock markets, along with ETF markets, act as net transmitters of spillovers, whereas Japanese, Chinese, and Indian stock markets act as net recipients of spillovers. DeFi, cryptocurrency, and green bond markets exhibit time-varying behavior but remain mostly net recipients. The portfolio analysis confirms that MIAs offer diversification benefits, though effective risk management requires asset-specific hedging strategies. Specifically, DeFi and cryptocurrency markets require different approaches than ETFs and green bonds.