Tail-risk connectedness and portfolio implications among gold-backed cryptocurrencies and G7 stock markets

This study examines tail-risk connectedness between gold-backed cryptocurrencies—PAX Gold (PAXG), Digix Gold Token (DGX), and Tether Gold (XAUT)—and G7 equity markets over the period from February 10, 2020, to September 12, 2024. We combine the Asymmetric Slope Conditional Autoregressive Value-at-Risk (CAViaR) model with a Time-Varying Parameter Vector Autoregressive (TVP-VAR) framework to capture dynamic spillovers at the 5% and 95% conditional quantiles. The results reveal substantial and time-varying system-wide connectedness, with pronounced increases around major episodes of global stress, particularly the COVID-19 pandemic and the Russia–Ukraine war. Subsample analysis further shows that total connectedness was higher during the COVID-19 period than during the Russia–Ukraine war under both tail-risk specifications. Network analysis identifies G7 equity markets, particularly Germany, France, and Italy, as the primary net transmitters of tail risk, whereas gold-backed cryptocurrencies remain comparatively weakly integrated into the tail-risk transmission network, although their systemic roles vary across model specifications. Geopolitical risk (GPR) is negatively associated with connectedness in both tails, while the CBOE Volatility Index (VIX) and U.S. Economic Policy Uncertainty (USEPU) are positively associated with both downside and upside connectedness. We further assess the portfolio implications of these dynamics using multivariate optimal weighting under the Minimum Variance Portfolio (MVP), Minimum Correlation Portfolio (MCP), and Minimum Connectedness Portfolio (MCoP) frameworks. The results indicate that the diversification benefits of gold-backed cryptocurrencies are conditional and portfolio-model-dependent, with DGX contributing primarily under the correlation- and connectedness-based strategies and XAUT under the minimum-variance strategy. Overall, the findings underscore the importance of dynamic asset allocation and specification-sensitive risk assessment when evaluating the diversification properties of gold-backed cryptocurrencies during periods of heightened market stress.