Equilibrium.

Quarterly Journal of Economics and Economic Policy

Volume 18 Issue 1 March 2023
p-ISSN 1689-765X, e-ISSN 2353-3293
www.economic-policy.pl
ORIGINAL ARTICLE

Citation: Zeng, H., Lu, R., & Ahmed, A. D. (2023). Dynamic dependencies and return connect-
edness among stock, gold and Bitcoin markets: Evidence from South Asia and China.
Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87. doi: 10.24136/eq.
2023.002

Contact to corresponding author: Abdullahi D. Ahmed, abdullahidahir.ahmed@rmit.edu.au

Article history: Received: 5.09.2022; Accepted: 27.01.2023; Published online: 30.03.2023

Hongjun Zeng
RMIT University, Australia
orcid.org/0000-0002-5437-2710

Ran Lu
Swinburne University of Technology, Australia
orcid.org/0000-0003-0229-0913

Abdullahi D. Ahmed
RMIT University, Australia
orcid.org/0000-0003-4472-0205

Dynamic dependencies and return connectedness among stock,

gold and Bitcoin markets: Evidence from South Asia and China

JEL Classification: F30; F37; G15

Keywords: South Asia and China; gold; Bitcoin; dependency and connectedness; COVID-19

Abstract

Research background: In order to examine market uncertainty, the paper depicts broad pat-
terns of risk and systematic exposure to global equity market shocks for the major South Asian
and Chinese equity markets, as well as for specific assets (gold and Bitcoin).
Purpose of the article: The purpose of this paper is to investigate the dynamic correlation
among the major South Asian equity markets (India and Pakistan), the Chinese equity mar-
kets, the MSCI developed markets, Bitcoin, and gold markets.

Copyright © Instytut Badań Gospodarczych / Institute of Economic Research (Poland)

This is an Open Access article distributed under the terms of the Creative Commons Attribu-
tion License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use,
distribution, and reproduction in any medium, provided the original work is properly cited.
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

Methods: While applying the GARCH-Vine-Copula model and the TVP-VAR Connectedness
approach, major patterns of dependency and interconnectedness between these markets are
investigated.
Findings & value added: We find that risk shocks from developed equity markets are critical
in these dynamic links. A net return spillover from Bitcoin to the Chinese and Pakistani stock
markets throughout the sample period is reported. Interestingly, gold can be applied to hedge
and diversify positions in China and major South Asian markets, particularly following the
COVID-19 outbreak. Our paper presents three main original add valued: (1) This paper adds
global factors to the targeted study of risk transmission among South Asian and Chinese stock
markets for the first time. (2)The assets of Bitcoin and gold were added to the study of risk
transmission among South Asian and Chinese stock markets for the first time, enabling the
research in this paper to observe the non-linear link among the South Asian and Chinese stock
markets with them. (3) Our research adds to these lines of inquiry by giving empirical evi-
dence on how COVID-19 altered the dependent structure and return spillover dynamics of
Bitcoin, gold and South Asian and Chinese stock markets for the first time. Our results have
critical implications for investors and policymakers to effectively understand the nature of
market forces and develop risk-averse strategies.

Introduction

As the world becomes increasingly financially integrated, linkages between

global financial markets are becoming more assertive. Inter-market correla-
tions have traditionally been a significant focus of academic research. The
investigation of correlations between financial markets is of great signifi-
cance for inter-market volatility spillovers, risk transmission, and asset
allocation (Natarajan et al., 2014). In the wake of the 2008/09 Global Finan-
cial Crisis (GFC) and the recent healthy crisis of COVID-19, the study of
market spillovers and contagion risk has grown considerably in importance
along with the huge concerns about systemic risk among various market
participants (e.g., Wu et al., 2021). Spillovers are measured quantitatively
through connectedness, as it is an important indicator of correlation be-
tween market factors (Diebold & Yılmaz, 2012; 2014). A high degree of con-
nectedness between networks of variables undoubtedly facilitates the rapid
propagation of systemic risk, especially during crises (Benoit et al., 2017).
In this study, each market is considered a portfolio asset (a node in net-
work), and the global stock markets are considered a common factor
among systematic risk factors. China and India are among the worldʹs fast-
est-growing emerging economic countries, and their relationship is pro-
foundly antagonistic and cooperative. At the same time, Pakistan and the
other major country in South Asia, has a relationship with China and India
at opposite extremes. China is currently the worldʹs second-largest econo-

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 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

my, while India is the worldʹs sixth-largest economy (IMF, 2021) and has
maintained high growth rates. Pakistan and India are vital countries and
major economies in South Asia and are critical members of the South Asian
Free Trade Area (SAFTA). However, political challenges, such as the India-
Pakistan conflict, will continue to stymie regional economic cooperation in
South Asia (Huda & McDonald, 2016). In addition, China was Indiaʹs top
trading partner, but the US has overtaken it in 2021 (Panda, 2021). And
India is Chinaʹs biggest South Asian trading partner. In recent years, China
has worked with Pakistan on large projects (China-Pakistan Economic Cor-
ridor), which has become the Belt and Roadʹs core and flagship project.
Pakistanʹs economic reliance on China has risen. At the same time, as the
earliest released and the largest market capitalized asset in the cryptocur-
rencies market, Bitcoin is quickly becoming a focus of attention for traders
seeking more speculative opportunities and investing in alternatives (Dy-
hrberg, 2016). As the most mature cryptocurrency asset in the cryptocur-
rency market, the examination of Bitcoin can serve as a vane for the re-
search of cryptocurrencies (Cohney et al., 2019; Zhang et al., 2020).
This research uses the Vine-Copula approach and the TVP-VAR con-
nectedness approach to study the dependency structure and return spillo-
ver effects of China, major South Asian stocks, gold and Bitcoin during the
period 2015–2021, and further analyses the dependency structure of risk
spillovers from these markets during COVID-19.
Our research contributes to the existing literature in three parts. This
paper adds global factors to the targeted study of risk transmission among
South Asian and Chinese stock markets for the first time. The influence of
developed market on Asian stock markets is becoming increasingly signifi-
cant (Burdekin & Siklos, 2012). There is no doubt that the trend towards
globalization will lead to a significant increase in global stock market link-
ages and closer potential spillover effects. However, the jury is still out on
whether major South Asian stock markets are connected to global risk fac-
tors, and existing studies only suggest that the high correlation between
stock markets in East and Southeast Asia is mainly due to common global
market factors (Chen, 2018). Thus, this will be among the first studies to
contribute to the existing literature by assessing the dynamic dependence
structure and return transmission channels of major South Asian stock
markets, as well as Chinese stock markets, and MSCI developed market
indices.

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 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

Meanwhile, the assets of Bitcoin and gold were added to the study, ena-
bling the research in this paper to observe the non-linear link among the
stock market with Bitcoin and gold. These two assets in this region are
beneficial for investors to construct portfolios to hedge against extreme
stock market risks and has implications for policymakers to identify sys-
temic risks. Despite becoming an increasingly popular and sought-after
asset, decentralized, decentralized-driven cryptocurrencies are gradually
being brought under the purview of national financial regulation. The
maturation and development of cryptocurrencies will create new shocks to
the effectiveness of unconventional monetary policies, especially during
financial crises where standard asset prices fluctuate sharply. Our research
also looks at how to support the financial system and prevent cryptocur-
rency bubbles from bursting to prevent economic shocks. In previous
works, most studies have focused on oil or have used the US stock market
as a proxy for developed markets (Sarwar et al., 2020), and studies on the
South Asian region have been far less specific than the variables we use
(Bitcoin and gold), thus feeding back more specific information that inves-
tors want, especially those interested in cryptocurrencies.
Finally, our research adds to these lines of inquiry by giving early em-
pirical evidence on how COVID-19 altered the return spillover dynamics of
various assets. COVID-19 (SARS-CoV-2) is a severe acute infectious disease
that was discovered in late 2019 and has since spread globally, resulting in
a major pandemic that has become one of the deadliest in human history.
Despite the fact that the body of literature on the financial and economic
impact of the COVID-19 has grown rapidly (e.g., Aslam et al., 2022; Mazur
et al., 2021), the research focus is scattered and our topic, in particular has
not yet been addressed.
The paper is organized as follows. Section 2 provide a brief literature
review. Section 3 presents the methodology and dataset. Section 4 analyzes
major empirical results and Section 5 discusses the important findings.
Section 6 outlines the conclusions and implications of the paper.

Literature review

While it is commonly considered that developed nations exert impact on

Asian financial markets through finance costs, portfolio rebalancing and
risk appetite channels, China primarily influences regional economies

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 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

through critical trade links (Arslanalp et al., 2016). Of the sparse studies on
South Asian and Chinese stock markets, most are included under other
thematic frameworks, such as BRICS (acronym for five leading emerging
economies: Brazil, Russia, India, China, and South Africa) or energy mar-
kets, and there is a lack of targeted research. Jebran et al. (2017) discover
that Chinese and Indian stock markets have significant two-way volatility
spillovers after the GFC, while Pakistani and Indian stock markets have
two-way volatility pre-GFC spillovers, leaving only a unidirectional volatil-
ity spillover from Pakistan to Indian stock markets after the crisis. The find-
ings obtained by Kumar and Dhankar (2017) conclude that the Indian-
Pakistanʹs stock market is highly integrated, but insensitive to fluctuations
in international markets. According to Shehzad et al. (2021), the volatility
spillover among the KSE (Karachi Stock Exchange of Pakistan) and SSEC
(Shanghai Stock Exchange) is minimal during steady times. During the
COVID-19 pandemic, however, there is a strong unidirectional volatility
spillover from SSEC to the KSE index.
Bitcoin is a specific virtual commodity that is not released by a mone-
tary authority and has no monetary properties such as legal tender (Baur et
al., 2018). Bitcoins are based on algorithms. Proponents believe that their
actual value derives from rule certainty, scarcity, anonymity, global circula-
tion. At the same time, critics argue that Bitcoins have neither the intrinsic
value of the gold standard nor the sovereign credibility of fiat money be-
hind them and lack the backing of actual economic activity and proper
security safeguards (Dorofeyev et al., 2018). Given these insights, and de-
spite some controversial elements, the volatility of Bitcoinʹs price has at-
tracted the interest of many investors, and the cryptocurrency market is
expanding. The explosion of Bitcoin has raised awareness among stake-
holders of the importance of decentralized currencies.
The recurring volatility in equity markets poses a significant risk to eq-
uity investments (Ghazali et al., 2020). China is the worldʹs largest gold
producer (World Gold Council, 2020) and the worldʹs cryptocurrency min-
ing hub, accounting for approximately two-thirds of global production and
holding the worldʹs most enormous Bitcoin hash rate (Chainalysis, 2020).
The South Asian markets, and India in particular, are also one of the largest
markets for gold and Bitcoin (Chainalysis, 2020; World Gold Council,
2021), indicating that both the Chinese and South Asian markets are strong-
ly connected to Bitcoin as well as gold. In a previous study, Dyhrberg
(2016), using an asymmetric GARCH model, found that Bitcoin has several

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 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

of the hedging properties of gold. It can act as a hedging instrument for

equities. But in contrast, Klein et al. (2018) find that gold is a high-quality
safe haven asset during periods of market turmoil, while bitcoin is positive-
ly correlated with downside markets. Their research concludes that bitcoin
does not reflect any of goldʹs unique properties. Jain and Biswal (2016) ob-
serve that the negative correlation between the Sensex and the gold price in
India is mutually caused. A fall in the gold price causes the Sensex (BSE
Sensex index) to fall, but a fall in the Sensex causes the gold price to rise.
Mensi et al. (2018) discover no evidence of co-movement between the Chi-
nese and Indian stock markets and gold, implying that gold might be uti-
lized as a hedge or safe-haven asset in the face of dramatic market swings
in China and India. According to Kyriazis (2020), Bitcoin is a good hedge
against stock market indexes, but not as good as gold. Bitcoin and gold
may have an asymmetric and nonlinear relationship. According to Pho et
al. (2021), gold is a better portfolio diversifier than Bitcoin, and Bitcoin is
more appropriate for risk-averse investors in China, but gold is more suita-
ble for risk-averse investors. Wang et al. (2019) used the VAR-BEKK-
GARCH framework and a Wald test to find that there was a two-way vola-
tility spillover among Bitcoin and gold, and that Bitcoin could be used to
hedge the Chinese stock market. However, the dynamic volatility between
assets is time-varying, and we will present the latest volatility spillovers
using a different sampling interval (2015–2021). In addition, Hung (2021)
applies a wavelet transform framework to find that both Bitcoin and the
stock market show signs of moderate integration. However, some studies
suggest that Bitcoin is less effective than gold. However, previous research-
ers have provided no conclusive evidence of a correlation between Chinese
and South Asian stock markets and Bitcoin. This is, therefore, a timely ef-
fort to undertake a scientific assessment and evidence-based discussions.
Furthermore, the role of Bitcoin as a safe haven asset is closely related to
other assets in the portfolio as well as economic cycles.
The Vine-Copula model is applied to characterize the dependency struc-
ture of paired assets, specifically the tail dependency structure. Tail de-
pendence structures can be used to discuss asset class correlations in finan-
cial markets, such as whether an increase (or decrease) in the price of one
market will cause an increase (or decrease) in the price of another market.
Furthermore, the Kendell rank dependence structure investigates the con-
sistency of price trends across markets, establishing a link between con-
sistency and correlation measures (Hollander et al., 2013). Our Vine-Copula

54
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

approach has an advantage over other studies that extensively use 2D Ar-
chimedes or Gaussian Copula (e.g., Syuhada et al., 2021) in characterizing
the nature of inter-market dependence, in that it can distinguish whether
the inter-market dependence structure is conditional through that market
or it is simply unconditional dependence (Goodwin & Hungerford, 2015).
Based on the nature of the dependencies, investors can make useful portfo-
lio adjustments. The Vine-Copula approach has gained popularity in recent
years for showing high-dimensional risk dependencies in precious metals,
cryptocurrencies and other markets (Sharma & Sahni, 2021; Talbi et al.,
2021).
Additionally, the copula approach has limitations. It focuses on the de-
pendence of the variance-covariance matrix and does little to address the
meanʹs dependence. In this regard, if we focus on the time-varying evolu-
tionary characteristics of the relationships among assets, the time-varying
parametric vector autoregression (TVP-VAR) approach may be considered
(Antonakakis et al., 2020). Unlike the copula technique, TVP-VAR can use
a Bayesian interpretation to capture the time-varying features of the mean
and variance matrices (Pham & Nguyen, 2021). We pay attention to time-
varying measures of spillover along the connectedness axis of the TVP-
dynamic VAR. We utilize the TVP-VAR method to overcome the drawbacks
of connectedness estimates based on the variance decomposition of stand-
ard VAR models; outcome sensitivity due to arbitrary rolling window peri-
od selections, and observation loss due to rolling window analysis. Addi-
tionally, it enables the capture of the overall connectivity metricʹs dynamics
as well as the structure of cross-asset connectivity. However, the disad-
vantage of TVP-VAR is that it does not account for the fat-tail characteris-
tics of financial market returns (Barro, 2006). This is a critical limitation for
our purposes, and thus the TVP-VAR connectedness approach is used in
conjunction with the Vine-Copula approach in this paper.
There is limited literature on the linkages between commodity assets
such as Bitcoin and gold and South Asian stock markets. Examining the
systemic risk dependencies among these financial markets is of great signif-
icance for inter-market spillovers, risk transmission, and asset allocation. In
particular, international institutions such as the International Monetary
Fund (IMF) and the governments of the countries concerned should moni-
tor the extent of linkages between China and South Asian economies and
certain popular assets to design strategies aimed a macro prudence to di-

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 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

versify risk. As well as to maintain financial stability in the region in the

presence of shocks of a global nature emanating from global market shocks.

Research method

Estimation of the marginal distribution

Historical data of stock market, commodity, and cryptocurrency returns

frequently exhibit ʹsharp peak and fat tailʹ and ʹvolatility clusteringʹ charac-
teristics. The GARCH modelʹs characteristics have an excellent ability to
explain such data; thus, it is well suited for estimating the marginal distri-
bution (Zeng et al., 2022). To eliminate the influence of autocorrelation and
heteroskedasticity on the return data, we fitted the marginal distributions
of the logarithmic daily return series of the markets with the AR(1)-GJR-
GARCH(1,1)-Skew-t framework and extracted the residual series after noise
reduction treatment. The model not only better captures the ʹleverage ef-
fectʹ among markets, but it also effectively depicts characteristics of the
paired marketsʹ return series such as ʹvolatility clusteringʹ and ʹsharp peak
and fat tailʹ (Glosten et al., 1993; Zeng & Ahmed, 2022). The standardized
residuals have a Skew-t distribution, as shown below:

= + + ,

ℎ, = + , + ℎ, + ,
(1)
, =ℎ, ,

, ∼ Skew Studentʹs ( , )

where denotes the logarithmic returns of paired markets price, ℰ , is the

standardized residual series, ℎ , indicates the conditional volatility, and ,
represents the residual. The mean of the model is set to be 0, the variance is
1, , <0
1, and is the indicator function = , , , , , is
0, Others
the parameter to be estimated for the model. And to achieve a better fit,
a skewed student-t fit distribution is used for the standard residuals in the
model.

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 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

Vine-Copula

With a small number of parameters, the copula is a useful probability

distribution for describing complex multivariate interdependencies. Copu-
la-based regression is a method of balancing the flexibility of regression
models with parameter conservation that has received a lot of attention.
Given that the n-dimensional random variable vector function ' =
(( , ( , ⋯ , (* ) , whose joint distribution has a density function of
+(( , ( , ⋯ , (* ), then the conditional density function can be shown as:

+(( , ( , ⋯ , (* ) = +* ((* )+((* |(* ) ⋯ +(( |( , ⋯ (* ). (2)

Different setting - (( ), - (( ), ⋯ , -* ((* ) as the marginal distribution of

( , ( , ⋯ , (* , there exists a Copula function such that -(( , ( , ⋯ , (* ) =
.- (( ), ⋯ , -* ((* )/. The joint density function can be expressed as:

+(( , ⋯ (* ) = 0 ⋯* .- (( ), ⋯ , -* ((* )/+ (( ) ⋯ +* ((* ) (3)

where, 0 ⋯* (•) is the probability density function of the n-dimensional

copula.
An n-dimensional R-Vine structure consists of n-1 trees, let the set of all
nodes on the first tree T1 be set is N1 = {1,2, ⋯ , n} and the set of all edges on
T1 is E1. The next n-2 trees, each node on tree Ti is a pair of variables on the
Ti-1 edge of the previous tree, i.e. Ni = Ei-1.
Given ' = (( , ( , ⋯ , (2 ), the joint probability distribution function of
the d-dimensional R-Vine is：

+(') = ∏245 +((4 ) ⋅ ∏25 ∏8∈:; 0<(8),4(8)∣>(8) ?-?(<(8) ∣ (>(8) @, -?(4(8) ∣ (>(8) @(4)

where Ei is the set of edges, e = j(e) and k(e)|D(e) is an edge in Ei,

0<(8),4(8)∣>(8) (·,·) is the corresponding Copula function, j(e) and k(e) are the
two conditional nodes connected to edge e, and D(e) is the set of conditions.
Aas (2009) introduced a particular framework for two famous vine-copula
structures, C-vine and D-vine. For n-dimensional dependencies, the C and
D-vine-copula functions are represented as:

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 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

C-Vine-Copula model:

+(') = ∏245 +4 ((4 ) ∏25 ∏2<5 0 , A<| :( )

(5)
C-(( |( , ⋯ , ( ), -?( A< |( , ⋯ , ( @D

D-Vine-Copula Model:

+(') = ∏24 +4 ((4 ) ∏25 ∏2<5 0<,<A |(<A ):(<A )

(6)
C-?(< |(<A , ⋯ , (<A @, -?(<A |(<A , ⋯ , (<A @D

The Vine-Copula model can generate three structures, C-Vine, D-Vine

and R-Vine. The selection of the optimal Vine-Copula structure is deter-
mined by calculating the AIC value and BIC, as well as the Vuong statistic.

TVP-VAR-based dynamic connectedness approach

Diebold and Ylmaz (2009), Diebold and Ylmaz (2012), and Diebold and
Ylmaz (2014) describe a widely used framework for estimating spillover in
predefined networks using vector autoregressive (VAR; Sims, 1980) mod-
els. Antonakakis et al. (2020) extended the above framework by introducing
a dynamic connectedness method based on time-varying parametric vector
autoregression (TVP-VAR), with the outcome that the dynamics are inde-
pendent of the rolling window size. Additionally, the TVP-VAR-based dy-
namic connectedness method has the following advantages: (i) it does not
require an arbitrarily large rolling window size; (ii) it permits the variance-
covariance matrix to estimate changes via the Kalman filter; (iii) it can be
used with low-frequency data sets; and (iv) it avoids observation loss. The
approach taken in this study is similar to that taken by Antonakakis et al.
(2020) and Bouri et al. (2021). To be more precise, estimate the TVP-VAR (1)
using the Bayesian Information Criterion (BIC), which can be summarized
as the following equation:

( =E( + ∼ F(0, G ) (7)

0( )= 0( )+ ∼ F(0, )

where H , H and I are k×1 dimensional vector

and J are k×k dimensional matrices. 0 ( ) and K are k2×1 dimensional
vectors, whereas γ is a k2×k2 dimensional matrix.

58
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

Then, following Bouri et al. (2021) .ʹs estimation steps, we estimated the
H-step ahead (scaled) Generalized-Forecast-Error-Variance-Decomposition
(GFEVD) framework (Koop et al., 1996; Pesaran & Shin, 1998), while main-
taining the GFEVDʹs variable ordering (Diebold & Ylmaz, 2009). The first
step in estimating the GFEVD spillover framework is to convert the TVP-
VAR to its Wold representation theorem vector moving average (VMA)
representation, represented as:

N
H =∑5 O H + I = ∑P
<5 Q< I < (8)

The scaled GFEVD was then normalized to the unscaled GFEVD，

(T), to bring the sum of each row to unity. Thus, U
S S
R <, R <, (T) to represent
the effect of variables j on variables i, i.e. the prediction error variance
share, which is defined as the pairwise directional connectedness
from j to i. And The indicator is calculated in the following,

S G , ∑V5 ?W X Y G W< @
R <, (T) =
∑4<5 ∑V5 (W Y G YX W )
(9)
^
[;\,] (V)
RZ <,
S
(T) = ^
∑a
\_` [;\,] (V)

where, ∑4<5 RZ <, (T) = 1, ∑4,<5 RZ <, (T) = b. And W is a selection vector with
S S

a unity at the ith position and zero elsewhere. RZ <, (T) explains the effect of
S

a shock to variable j on variable i.

Based on the GFEVD, we first calculate the total connectedness index,
which is calculated by the following equation:

^
∑f ˜
\,;_`,\e; [\;,] (V)
c d = (10)
h

If the indicator is relatively high, it indicates that the network is highly

interconnected and that market risk is high as shocks to one variable affect
other variables, whereas a low indicator indicates that the majority of vari-
ables are fairly independent of one another, implying that shocks to one
variable do not result in adjustments to other variables, suggesting a low
market risk. The combined effect of a shock to variable j on all other varia-

59
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

bles is then calculated represented as total directional connectedness to

others, as:

S
ci< = ∑45 , j< R̃ <, (T) (11)

We calculate the sum of all other variablesʹ effects on variable j, which is

defined as total directional connectedness from others:

-kil< = ∑45 ZS
, j< R< , (T) (12)

We calculate net total directional connectedness by subtracting total di-

rectional connectedness to others from total directional connectedness from
others. This value indicates whether a variable is a net transmitter/receiver
of shocks, as:
Fmc< = ci< − -kil< (13)

Finally, as shown in the following equation, there is the net pairwise di-
rectional connectedness (NPDC) among variables i and j:

S S
Fop < (T) = R̃< , (T) − R̃ <, (T) (14)

A positive (negative) value for Fop < indicates that variable i domi-
nates over (is dominated over) variable j.

Data

This research investigates the impact of the MSCI Global Market Index,
the dynamics of the interconnections among China, the major South Asian
stock markets, and the markets of gold and Bitcoin. We use data from the
daily closing prices of the Bitcoin market (BTC), the MSCI developed mar-
ket index (MSCI), China (CSI 300), Pakistan (KSE), India (BSESN), and the
gold market (Gold). The reason India and Pakistan were chosen as the main
markets in South Asia for this study is that China and India have been stra-
tegic rivals in South and East Asia, and China has developed close com-
mercial and military ties with its Indian ʺcounterpartʺ Pakistan (e.g., BBC,
2021). It is therefore of particular interest to examine the links between
these markets. Non-common trading days are excluded due to the different
trading hours of the different markets. The sampling period for this paper

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 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

is from 14 September 2015 to 30 March 2021, with 1,181 observations. Both

gold and stock market data are taken from DataStream
(http://product.datastream.com/) and Bitcoin data from the CoinDesk web-
site (https://www.coindesk.com/). For the data smooth, logarithmic differ-
encing was used to find the first order log-returns of the paired market
price indices.

Results

The results of descriptive statistics are shown in Table 1. First, we consider

market volatility. Markets with the highest standard deviations are ob-
served to be Bitcoin, China’s CSI, and Pakistan’s KSE, while gold, MSCI
and India’s BSESN have very low relative standard deviations. This means
that these four markets are more volatile than gold and developed markets
over the entire sample interval. The return series for all pairs of markets are
left-skewed except for gold, where the return series is right-skewed. All
paired markets have excess kurtosis greater than three. The Jarque-Bera test
rejects the original hypothesis that the return series follows a normal distri-
bution, suggesting that the return series of all markets is non-normal with
ʺsharp peaks and fat tails.ʺ The Q(20) results show that the return series of
all markets are autocorrelated. In contrast, The ARCH-LM result shows
that the return series of all paired markets have a strong ARCH effect, so
the volatility aggregation of the return series of all paired markets is signif-
icant and therefore suitable for modelling using the GARCH family model.
The ADF test results indicate that the return series of all paired markets are
smooth and do not give rise to pseudo-regression problems. We then plot
the return series for each stock market over the sampling period in Figure
1. We can easily observe the volatility profile of each paired market over
the sample period, with the most volatile period for each market undoubt-
edly being the early part of the COVID-19 outbreak in early 2020. Since the
stock market returns have significant non-normal characteristics and vola-
tility clustering effects, the article uses the AR(1)-GJR-GARCH(1,1)-Skew-t
model to further characterize the stock market return data. The first-order
autoregressive model AR(1) is commonly used in financial data correlation
analysis to eliminate the autoregressive properties of the sample data. In
contrast, the leverage effect, heteroskedasticity, and volatility aggregation
characteristics of the sample data can be better fitted using the GJR-

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 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

GARCH(1,1) model. Finally, the Skewed Student-t distribution (Skew-t) is

used to characterize the standardized residuals, reflecting the presence of
“spikes”, “thick tails”, and “skewed” characteristics. Furthermore, in Fig-
ure 1, we find dramatic volatility in both markets in the early 2020 (corre-
sponding to the COVID-19 outbreak), which justifies our further analysis of
the COVID-19 period.
Table 2 introduces the estimates and test results of the marginal distri-
bution parameters for the return series for each market. We observe that
most of the parameters are significant. Our particular interest is that the
leverage coefficient γ for the BTC markets is less than 0. Therefore, it can be
judged that the BTC market has a strong leverage effect, which is manifest-
ed by the fact that the impact of positive news is significantly more im-
portant than that of negative news. The Skew-t distribution of the standard
residuals with the skewness parameter λ and the degrees of freedom pa-
rameter v is both highly significant and statistically significant at the 1%
confidence level. Therefore, the hypothesis that all return series obey
a normal distribution is rejected, in line with the previous descriptive statis-
tics, suggesting that return series in all markets have non-normal character-
istics such as ʹskewʹ and ʹfat and peak tailsʹ. At the same time, the p-values
of the Kolmogorov-Smirnov tests are all significantly greater than 0.05. We
can identify that the conditional marginal distribution obtained from the
AR(1)-GJR-GARCH(1,1)-Skew-t model estimation and that the residual
series obtained after the probability integral transformation (PIT) obeys the
U (0,1) uniform distribution. We see an identical independent distribution
in this case. We note that the residual sequences obtained after the proba-
bility integral transform (PIT) denotes an independent and homogeneous
U(0,1) distribution. This meets the requirements of the Copula family mod-
elling. We then apply the maximum spanning tree (MST) algorithm to se-
lect the optimal vine-copula dependence structure for the paired markets.
We first estimate the structure of the Vine-Copula based on the Maxi-
mum Spanning Tree algorithm. After determining the relevant structure of
the Vine-Copula, we choose an optimal pair-copula function for each edge
in the tree to be able to characterize the dependency structure between the
random variables. We identify the optimal vine structure mainly by the
values of AIC, BIC criterion and likelihood ratios. We also used the Vuong
test to compare and pair models two-by-two. According to Table 3, the
values for AIC and MLE show R-Vine as the optimal structure, and the
optimal result for BIC shows D-Vine. The Voung test results in Table 4 in-

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 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

dicate that the difference between the two is not statistically significant, as
the p-values for all three vine structures are positive. However, because the
statistics values are all positive, we prefer the R-Vine structure. In sum-
mary, the C-Vine structure is the aptest portrayal of the six paired market
interdependencies.
According to Table 5, the tree 1 illustrates the unidirectional correlations
between markets. The correlation structure of the paired markets exhibits
dispersion in terms of node orders over the sample period (R-Vine struc-
ture). There is a strong lower-tail correlation (0.19), but no upper-tail corre-
lation, between CSI and MSCI, implying a strong correlation between these
two markets during market declines but not during rallies. In response to
adverse shocks, we can assume a higher probability of extreme downside.
As a result, caution should be exercised when constructing a diversified
portfolio to avoid the risk-averse portfolios described above. The same
situation exists for the CSI-KSE, and special attention should be paid to
these marketsʹ volatility in order to mitigate volatility transmission and risk
transfer between markets. The Indian stock market has the strongest un-
conditional correlation with developed market indices (Kendallʹτ = 0.25).
The upper tail correlation coefficient between the BSESN-MSCI indices is
larger than the lower tail dependent coefficient, implying that volatility
caused by positive shocks is more significant than volatility caused by neg-
ative shocks. Meanwhile, gold has weak unconditional positive correlations
with the Chinese stock market and Bitcoin (Kendallʹτ= 0.04 and 0.03, re-
spectively), but the tails are asymptotically independent, indicating that
gold and these markets are not inextricably linked.
When conditional markets are included at the second level of the tree
structure, the tail correlations among the Chinese market and the other
markets exhibit asymptotically independent structures. Additionally, the
conditional correlation between the CSI and the BSESN is Kendallʹτ = 0.13,
indicating a low correlation, and the developed market indices function as
conditional markets. There are weak conditional correlations between the
KSE and MSCI, Gold and the KSE, and the CSI and BTC, and all of them
exhibit a Studentʹs t distribution with equal upper and lower tail coeffi-
cients but asymptotically independent tails (tail dependence coefficients
close to zero). We can conclude that as more conditional markets become
known, the correlation between them decreases, implying that the uncondi-
tional dependent is significantly larger than the conditional dependent
coefficient.

63
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

Starting from the 3rd level of the tree, we can find that with the inclu-
sion of more than two conditional markets, all markets show an asymptoti-
cally independent conditional correlation structure (Kendallʹτ close to 0)
and a weak tail correlation (both upper and lower tail coefficients close to
0). We can conclude that the conditional correlation coefficients fall more
significantly after the inclusion of conditional markets, suggesting that the
inclusion of conditional markets acts as a diversifier of risk between mar-
kets. Investors should be mindful when constructing diversified portfolio
choices that asset correlations are critical in verifying how assets interact
with each other and the strength of the interconnections. According to the
diversification principle, investing in less correlated assets reduces the like-
lihood of investment losses.
The significant point of the Copula method is that it can consider the tail
risk relationships and dependent structure between variables, but it cannot
help to understand the return spillover transmitters (receivers) that a par-
ticular variable plays within the sample period. Nor can it help us to un-
derstand the time-varying relationship and total connectedness over the
sample period. Therefore, we will use a TVP-VAR based connectedness
approach to fill these gaps in the next part.
We show the results of dynamic connectedness applying the TVP-VAR
approach in Table 6, which enables us to discover the specifics of return
spillovers among the system and individual financial assets. This section
includes various measures of return connectedness for the sampled paired
markets. We can see from these preliminary results that the TCI is 21.65%,
demonstrating that the influence of all other financial assets accounts for
21.65% of the forecast error variation of one financial asset, indicating few
financial asset connectedness. Also, based on the study of the time-varying
relationship of TCIs in Figure 2, we can see that the magnitude of connect-
edness reached its highest level (close to 50%) during COVID-19 (early
2020). When comparing the degree of connectedness that exists in market
states, we note that the high level of connectedness is more pronounced
during COVID than before the COVID-19 outbreak. Meanwhile, market
fears arising from the US-China trade war in mid-2018 also led to the TCI
breaching 30%. In short, these markets are less connected in crisis-free pe-
riods than in crisis periods. The MSCI Developed Markets Index is the
largest average contributor to the system (38.05%), followed by the Indian
market (28.55%) and finally the Pakistan market (14.47%). The above in-
formation also comes to a clear conclusion in the examination of Figure 3.

64
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

The MSCI Developed Markets Index has the most significant degree of
time-varying transmission when compared to all other markets. Following
that, we investigate the systemʹs net return connectedness, which captures
the difference between transmitted and received shocks for each financial
asset when the entire network is considered. In Table 6 and Figure 4, we
concentrate on the systemʹs net total connectedness. We observe that the
MSCI index and the Bitcoin market are net shock transmitters during the
entire study period. Our results concur with those of Abbas et al. (2013),
who found that developed market return spillover to South Asian and Chi-
nese markets as a result of their market size and importance in the global
financial system. Throughout this time period, the MSCI index served as an
excellent hedge against other market risks. There is evidence that BTCʹs
role as a net shock transmitter is closely related to peopleʹs fears and risk
appetites in the aftermath of the crisis outbreak (Chen et al., 2020). Howev-
er, it is important to highlight that in Figure 4, BTC becomes a net receiver
of return after the COVID-19 outbreak. Interestingly, we observe that the
Pakistan market, gold market, and CSI index have been net receivers
throughout the COVID-19 outbreak. One potential explanation for gold’s
becoming free of return spillover could be that the outbreak of COVID-19
could lead to investors’ closing out their positions, resulting in a large de-
mand for cash (Umar et al., 2021).
By analyzing risk spillovers and their spatial linkages, systemic risk can
be managed more effectively (Blasques et al., 2016; Gong et al., 2019). Next,
we use network diagrams to identify the sources of risk spillover shocks
and the direction and intensity of return shocks transmitted (received) by
the market in the system, which is also a visualization initiative for the
results of the spillover structure of the paired markets in Table 6. Figure 5
shows a network diagram of the pairwise directional connectedness of the
network for the TVP-VAR connectedness approach. The nodes in the net-
work diagram are the six paired markets we have studied. To visualize the
main nodes, we use the absolute values in the ʺNETʺ row in Table 6 to indi-
cate the size of the nodes. Red nodes indicate net spill receivers and green
nodes indicate net spill transmitters. The arrows indicate the direction of
the overflow. The thicker the line connecting the nodes, the stronger the
volatility spillover effect.
Our findings, in general, can assist investors in developing successful
portfolio diversification and risk management techniques. Portfolio man-
agers, for example, can utilize net pairwise connectedness across asset clas-

65
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

ses to compute hedging ratios and appropriate weights for diversified port-
folios.

Further analysis: during COVID-19 period (23/01/2020–30/03/2021)

Financial markets as a system are inextricably linked to their various

subsystems. When a financial crisis occurs, the increased volatility spillover
effect frequently causes the financial crisis to spread rapidly from one mar-
ket to another, resulting in a contagion effect and a cascade of other factors
resonating to increase market-wide investment risk and create systemic
risk (Bekiros, 2014; Kim et al., 2015; Lu & Zeng, 2022). COVID-19 was
a significant crisis event, resulting in unprecedented volatility and changes
in the correlations between financial markets, necessitating adjustments to
risk management strategies and portfolio asset structures. As a result, our
subsequent analysis examines the correlation among the COVID-19 crisis
and the sample markets, assessing the extent of crisis contagion between
the sample markets and the correlation structure of the paired markets
following the COVID-19 crisis. Our subsequent analysis will cover the pe-
riod 23 January 2020 to 30 March 2021. On 23 January 2020, Wuhan, the city
where COVID-19 is primarily found, implemented the worldʹs first
COVID-19 lockdown (BBC, 2021; Zeng & Lu, 2022).
To emphasize the most important findings and conserve space, we have
omitted results from the marginal distributions, beginning with Vine-
Copula. Following the COVID-19 outbreak, R-Vine results are presented in
Table 7, revealing a significant shift in the dependence structure among the
full-period paired markets.
According to the results of Table 7, there is no upper tail dependence for
CSI 300-KSE at the first level of the tree, but there is a significant lower tail
dependence (0.29). This implies that during bear markets, these two mar-
kets may appear to fall in lockstep. Separate portfolios comprised entirely
of these two markets should be avoided in a portfolio, as the probability of
loss is extremely high. This also reflects Pakistanʹs economyʹs high reliance
on China. Petry (2022) argues that China has invested more than US$60
billion in Pakistan to develop roads, energy projects, technology diffusion,
and economic zones in order to create industrial zones and advance Paki-
stanʹs infrastructure, and that the slowdown in Chinese projects following
the outbreak of COVID-19 has resulted in job losses and a decline in GDP,
affecting investorsʹ risk appetite. In comparison, the BSESN-MSCI exhibits

66
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

a moderate degree of dependence (Kendallʹτ = 0.33), with the upper tail

dependence coefficient (0.28) being larger than the lower tail dependence
coefficient (0.20). Portfolios comprised entirely of these two markets were
more likely to earn returns over the sample period. This also demonstrates
that, as South Asiaʹs largest emerging market and the most open economy,
India remains inextricably linked to developed markets following the
COVID-19 outbreak. There is no tail correlation for CSI 300-BTC elsewhere,
but a weaker correlation exists (Kendallʹτ= 0.16).
From the second tree onward, the majority of market portfolios exhibit
asymptotically independent disjunctive structures. Notably, BSESN-KSE is
conditionally dependent on the Chinese stock market, with no evidence of
a lower tail. When combined with the CSI 300-BSESN, the first tree exhibits
a moderate level of dependence (Kendallʹτ = 0.25). While the direct connec-
tion among the Indian and Pakistani stock markets is tenuous, they are
both more closely linked to the Chinese market, with Chinese market fluc-
tuations directly affecting these two markets. For the remainder, there is no
tail correlation between market portfolios, either due to low dependence
(low Kendallʹτ coefficient) or an absence of tail correlation, which we will
ignore.
Due to the fact that the current COVID crisis has significantly altered
the business cycle, it is critical to examine the systemic and interplay effects
of financial market return connectedness. To conduct further analysis of the
COVID-19 pandemicʹs impact on the return spillover caused by market-
wide connectedness. The TVP-VAR Connectedness approach enabled us to
analyze net shock transmitters or receivers within asset systems, expanding
our limited insight into the nature and scope of return shock propagation
in the aftermath of the catastrophic COVID-19 outbreak.
According to Table 8, there is evidence of boosted correlation among fi-
nancial assets following the global COVID-19 pandemicʹs onset, with TCI
values (32.32%) indicating increased financial asset interconnectedness
following the COVID-19 outbreak. With values of 48.20% and 42.04%, re-
spectively, the Indian stock market and MSCI were the highest shock
transmitters, while gold was the lowest giver (20.87%). Additionally, the
BTC Index, Chinaʹs stock market, and Pakistanʹs stock market all exceeded
20% in value. Interestingly, in the ʺFROMʺ column, Gold suffered the least
damage (20.12%) from other markets, while the BSESN Index suffered the
most (40.60%) from other markets. More importantly, we wanted to deter-
mine whether each asset received or transmitted more shocks, as indicated

67
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

by net spillover. Only MSCI and the Indian stock market were clearly net
shock transmitters (6.86% and 7.60%, respectively), implying that they
transmitted more shocks than they received. Besides, as evidenced by the
negative value of their net spillover, the CSI index appears to have been the
most adversely affected. The same is true for BTC and Pakistan, all of
which have negative net premiums. As a result, investors in these markets
are considering alternative assets. In the case of gold, we find an increase in
the spread of spillovers from other asset classes to the gold market when
compared to the overall sample (-2.36% to 0.75%). Just as gold has been
shown to generate positive returns during economic downturns (e.g., Baur
& Lucey, 2010; Klein et al., 2018), we believe gold can be applied as a hedge
and safe haven by global investors during the uncertainty period.
We then consider paired measures of directional connectedness, i.e.,
spillover effects between paired financial variables. We again use network
diagrams to recognize the direction and intensity of net return spillovers in
our selected paired markets during COVID-19, as shown in Figure 6. First,
the network structure of return spillovers in the system after the COVID-19
outbreak is reported in Figure 6 as having changed significantly compared
to the full sample period. Specifically, we find that MSCI has the highest
correlation with the Bitcoin market during COVID-19, compared to MSCIʹs
lower risk of spillover to the gold market following the COVID-19 out-
break. This result echoes the findings of Shahzad et al. (2020), who observe
that gold provides higher and more stable returns to developed markets
than Bitcoin when markets are in a bearish condition. At the same time,
combining Figure 6 and Table 8, gold is not as strongly connected to risk as
the Chinese and Indian stock markets, and we can confirm that gold can
provide higher and more stable returns to the Indian and Chinese markets
during COVID-19. In contrast, Bitcoin only sends spillovers to the Chinese
and Pakistani markets. In addition, we report that the Indian stock market
sends spillovers to the rest of the markets and that the Indian stock market
has a strong impact on both the Chinese and Pakistan stock markets. In
contrast, the Chinese and Pakistani stock markets are affected by spillovers
from all markets. This is due to the outbreak of COVID-19, which first had
a significant effect on the Chinese market, which dropped by around 15%
in the first quarter of 2020 (KPMG, 2020). In contrast, the Pakistan stock
market is more vulnerable to other stock markets during periods of market
stress due to foreign direct investment and bilateral trade (Donaubauer et
al., 2020).

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 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

Our analysis contributes to these fields of study by providing prelimi-

nary econometrics evidence on the impacts of the COVID-19 outbreak on
the dynamics of return spillovers across assets. Notable is the fact that, in
terms of linkage, the connectedness between Bitcoin and other financial
assets increased significantly following the COVID-19 outbreak, to the
point where it became a net sender of spillover to the system. The COVID-
19 outbreak also increased connectedness between regional and developed
markets. The findings of this paper can assist investors in developing di-
versified cryptocurrency portfolios that maximize returns while balancing
risk.

Robustness test

We set the forecast horizon to 150 days to test the robustness of our re-
turn connectedness findings in full sample analysis, and to determine if the
trend of the dynamic connectedness index remains consistent. Figure 7
depicts the dynamic total connectedness index over a 150-day forecast
horizon based on the TVP-VAR framework. Observably, the dynamics,
frequency, and intensity of the connectedness index in Sections 4 are nearly
identical. Consequently, the optional forecast horizon has no significant
effect on the findings, and our results are compatible with the accuracy of
our empirical conclusions.

Discussion

The Vine-Copula outcomes represent that extreme tail dependence exists in

both the full sample period and the COVID-19 period, with the MSCI index
having the strongest dependence on the Chinese and Indian markets in the
total sample period; while during COVID-19, the Chinese market becomes
the center of the dependence structure and there is extreme upper or lower
tail dependence between many market pairs. We also construct a spillover
network based on the TVP-VAR connectedness method to identify the in-
tensity and direction of contagion of return spillover across time. We report
that the MSCI index acts as the main spillover transmitter in both the full
sample period and the COVID-19 period, while the Chinese and Pakistani
markets mainly act as spillover receivers. At the same time, we obtain evi-
dence that gold acts as a ʹsafe havenʹ against uncertainty shocks. This find-

69
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

ing is in accordance with Elsayed et al. (2022). These results provide useful
information for investors with different levels of risk aversion and different
investment strategies. For example, identifying the correlation structure of
different markets as well as tail correlations can help investors build effec-
tive portfolios. In addition, these results are of importance to policymakers
seeking to pursue policies during periods of market stress (e.g., COVID-19)
and to track the risk transmission network across the spillover system. In
particular, changes in the structure of interdependence and the correlation
of risk spillovers in the system over time may help policymakers develop
differentiated and flexible regulations in times of crisis.
The following empirical results are noteworthy: As shown in Figure 5,
we find that the MSCI Developed Markets Index acts as a consistent net
volatility spillover pass-through to all markets over the full sample period,
implying that major South Asian markets, Chinese markets, and gold and
Bitcoin markets are subject to information and risk spillovers from the
MSCI index, a finding consistent with Mensi et al. (2021). This is because as
international investors become more involved in these markets, their vul-
nerabilities become more susceptible to global market dynamics. The Chi-
nese market is most significantly affected by the MSCI spillover over the
full sample period, while there is only a net spillover from the Chinese
market to the Pakistani stock market. This shows that the Chinese market is
more exposed to risks from international markets. According to Figure 5,
the Pakistani market is subject to spillovers from all other markets over the
full sample period. Next, we find that there is a net spillover from the Indi-
an market to the Chinese and Pakistani markets over the sample period.
Combined with Table 6, we find that the Indian market has a 12.44% spillo-
ver effect on the MSCI index, while the MSCI Developed Markets Index has
a 14.50% spillover effect on the Indian market. This finding reflects the fact
that due to the internationalization of the Indian market and the high share
of foreign trading, any significant change in the global market will quickly
affect the Indian market and vice versa. In contrast, the Chinese market is
less open to the outside world than the Indian market, as evidenced by the
strict foreign investment regime. This explains why the return of the Chi-
nese market send to the MSCI Developed Markets Index only by 5.69%,
which is lower than that of the Indian market. Finally, China is an im-
portant market for Bitcoin and gold, despite the fact that the Chinese gov-
ernment currently bans cryptocurrency trading (Cheng & Yen, 2020). How-
ever, according to Figure 5, gold return does not seem to spill over signifi-

70
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

cantly into the Chinese market but combined with the findings of Corbet et
al. (2020) and Shahzad et al. (2019), over the whole sample period, we infer
that gold is not a major hedge against Chinese market volatility. Bitcoin, on
either hand, may be viewed as a diverse asset for the Chinese stock market
(Kliber et al., 2019).
Based on the reports in Table 7, we can draw the following conclusions:
(i) Following the COVID-19 outbreak, Chinaʹs stock market became a focal
point for volatility spillover. This is demonstrated by the fact that the ma-
jority of markets and market portfolios in the first and second trees are
dependent on the Chinese market or are conditionally dependent on it; (ii)
the Vine-Copula structureʹs tail correlation coefficients indicate that the
majority of markets either lack tail correlation following the COVID-19
outbreak, or exhibit extreme tail correlation, such as only upper or lower
tails.
Based on the results shown in Table 8, we can further analyze the results
of the directional return spillover index in conjunction with the spillover
values in order to obtain information that cannot be observed in Figure 6.
We note that the analyzed values of paired directional connectedness are
significantly larger than those found in the overall sample of Table 6. So,
this connectedness index is highly unstable. We can say that the current
COVID-19 crisis is causing structural changes in financial market connect-
edness. Indeed, as shown in Table 8, while spillovers between Indian stock
markets and developed markets remain large, the spillover effect from
Indian markets to developed markets (16.47%) is larger than that from de-
veloped markets to Indian markets (14.80%). This offers evidence that the
spillover effect from the Indian to the MSCI was more significant during
COVID-19 relative to the full sample period. Using the similar reasoning,
we can also highlight that the MSCI spillover effect to the Pakistan and
China markets was more significant during COVID-19. Meanwhile, the
spillover effect of Bitcoin on MSCI markets was high during COVID-19,
reaching over 4%. This is because Bitcoinʹs speculative nature and impact
on mainstream assets made it a stress transmitter after the COVID-19 out-
break, a situation that was particularly evident in developed markets. Par-
ticularly intriguing is the increase in two-way return spillovers between the
Indian and Pakistani markets following the COVID-19 outbreak (13.16%
and 15.77% respectively), and what should not be overlooked is the in-
crease in connectedness during turbulent times. During the financial crisis,

71
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

there is evidence of significant return spillovers in the risk patterns of

South Asian markets (Iqbal et al., 2020).

Conclusions

Gold is a hard currency asset used for international liquidity settlement

and a critical asset for value preservation, whereas Bitcoin is a popular
alternative asset and the most prominent cryptocurrency underlying at the
moment. The aim of this research is to provide econometrics evidence of
dependence structures and return spillovers from gold and Bitcoin to major
China-South Asia stock markets in the context of risk shocks to global stock
markets. The findings are relevant to understanding South Asiaʹs regional
economic structure. And, in contrast to previous research, the findings of
this paper contribute to the analysis of Chinaʹs linkages with major South
Asian economies (India and Pakistan) during times of global shocks (espe-
cially COVID-19), as well as to the further investigation of gold and
Bitcoinʹs dependence and volatility connectedness on the aforementioned
markets.
We use a combination of different econometrics methods, including the
GARCH-Vine-Copula and TVP-VAR Connectedness approach to examine
the tail-dependence framework and network of return spillovers between
major South Asian markets, Chinese and developed markets, as well as
gold and Bitcoin. The following are the findings of our empirical research:
(a) The dependence structure of paired markets is an R-Vine structure; (b)
many market portfolios have an extreme tail dependence structure, which
means that only the upper or lower tails are correlated; and (c) The TVP-
VAR Connectedness study results confirm the increasing connectedness
across financial systems during the COVID-19 outbreak. Throughout the
sample period and the COVID-19 period, MSCI was the only net return
transmitter. In contrast to gold, which became a net transmitter of volatility
during the COVID-19 outbreak, Bitcoin became a net receiver of return
throughout the COVID-19 era. The findings of this paper suggest that gold
and Bitcoin are highly externally correlated in paired markets as hedging
and safe-haven assets. This can benefit policymakers in the countries con-
cerned, particularly in the context of global shocks, and can assist investors
in allocating assets based on their risk tolerance. Meanwhile, the Chinese
stock market is less internationalized than the Indian stock market because

72
 Equilibrium. Quarterly Journal of Economics and Economic Policy, 18(1), 49–87

it is not as well connected to global markets as the Indian stock market. As

a new asset class, Bitcoin has significant implications for asset diversifica-
tion.
Specifically, policymakers in the three countries should develop practi-
cal strategies to prevent shocks from developed markets, so that financial
authorities in the three countries can respond quickly to global financial
risks and make reasonable and appropriate policy adjustments. At the same
time, policymakers should be concerned about the high speculative risks
and the presence of illegal operations such as money laundering in the
Bitcoin market and strengthen regulation of the Bitcoin market.
This research also has some limitations, such as the limited number of
markets examined and the fact that another novel methodology could be
applied depending on data availability. Further analysis of other asset clas-
ses, such as the inclusion of crude oil markets, could be undertaken in the
future when examining the relationship between regional equity markets
and other emerging financial markets. The use updated forecasting meth-
ods such as novel quantile-based return frequency spillover measures to
simultaneously examine tail risk, the structure of connectedness in the time
and frequency domains may be preferred.

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79
Annex

Table 1. Basic analysis of return data for all markets

BTC MSCI CSI KSE BSESN Gold

Mean 0.4684 0.0465 0.0373 0.0243 0.0561 0.0355

Mini -31.9439 -10.4412 -8.2087 -7.8632 -11.4702 -5.1069
Max 23.7246 6.4392 7.4263 6.9267 8.5947 11.2197
Std.Dev 5.0549 1.0703 1.4066 1.2473 1.2288 1.0382
Skew -0.4120 -1.6379 -0.6460 -0.6046 -0.9704 0.8370
Kurtosis 4.8043 20.5399 4.9147 5.6255 15.5427 14.4481
Jarque-Bera 1174.6*** 21353.0*** 1276.4*** 1636.1*** 12111.0*** 10444.0***
ARCH-LM(20) 63.85*** 607.12*** 101.84*** 188.61*** 396.49*** 69.46***
ADF -9.52*** -9.99*** -10.39*** -9.88*** -10.05*** -9.36***
Q(20) 30.11* 203.36*** 125.929*** 42.94*** 74.98*** 38.73***
Note: The table demonstrates summary statistics of daily returns from 14 September 2015 to 30 March 2021.
Jarque-Bera statistic is a test of normality. Q(20) is the Ljung–Box test of serial correlation of up to 20 lags in
the statistics of the return for serial correlation of order 20 in returns. ARCH-LM is the LM test for
autoregressive conditional heteroscedasticity. ***, ** and * indicate significant levels at 1%, 5% and 10%,
respectively. BTC indicates the Bitcoin market; MSCI indicates the MSCI Global Market Index; CSI indicates
the Chinese CSI 300 index; KSE indicates the Karachi Stock Exchange of Pakistan; BSESN indicates the Indian
BSE Sensex index.

Table 2. Estimation of the marginal distribution

BTC MSCI CSI KSE BSESN Gold

C0 0.3868 ***
0.0534 ***
0.0711 **
0.0414 0.0480 **
0.0252
C1 0.0213 0.0688** -0.0017 0.1624*** 0.0647** -0.0448*
ω 0.2761 0.0181*** 0.0215** 0.0647*** 0.0349*** 0.0070***
α 0.1306*** 0.0030 0.0634*** 0.0066 0.0000 0.0265***
β 0.8908*** 0.8645*** 0.9156*** 0.8537*** 0.8811*** 0.9734***
γ -0.0442 0.2225*** 0.0284 0.1966*** 0.1732*** -0.0123
3.3167*** 4.2910*** 4.4126*** 5.0873*** 5.6743*** 3.5461***
1.0223*** 0.8764*** 0.9854*** 0.9658*** 0.8970*** 0.9715***
LL -3358.029 -1256.768 -1871.099 -1729.929 -1564.980 -1523.812
AIC 5.705 2.144 3.185 2.946 2.666 2.596
BIC 5.740 2.178 3.219 2.980 2.701 2.631
0.0338 0.0233 0.0160 0.0188 0.0203 0.0140
K-S
（0.1358） (0.5444) (0.9237) (0.7986) (0.7186) (0.9746)
Note: This table provides parameter estimates of marginal distribution models in parentheses, the meaning
of parameter as Eq.(1). K-S defines the Kolmogorov-Smirnov bootstrapping test. ***, ** and * indicate
confidence levels at 1%, 5% and 10%, respectively.
Table 3. Goodness-of-fit tests for different Vine-Copula models

R-Vine C-Vine D-Vine

AIC -446.96* -444.73 -444.22
BIC -320.13 -322.97 -327.54*
MLE 248.48* 246.37 245.11
Note: This table shows the information criteria for the three Vines. The best copula fit is selected based on
the minimum Akaike information criterion (AIC) and Bayesian information criterion (BIC) and the
maximum likelihood estimation (MLE) value. * represents the chosen optimal Copula function.

Table 4. Vuong Test

D-Value P-Value
C-Vine V.S. D-Vine 0.2552927 0.798497
R-Vine V.S. C-Vine 0.4029747 0.6869668
R-Vine V.S. D-Vine 0.8588613 0.3904171
Note: This table reports the Vuong test with null that Three Vines are statistically equivalent. The results
indicate that we cannot reject the null hypothesis.

Table 5. Results of the vine-copula models for the six pair markets in the full
sample period

Vine Parameter Parameter Kendall'

Pair-Copula Upper Lower
edge 1 2 τ
2|5 BB1 0.31 1.15 0.25 0.17 0.15
3|2 Survival BB1 0.11 1.16 0.19 0.00 0.19
Survival
3|4 1.11 0.00 0.10 - 0.14
Gumbel
6|1 Joe 1.06 0.00 0.03 0.08 -
6|3 Student’s-t 0.06 7.39 0.04 0.02 0.02
3,5|2 Student’s-t 0.20 10.58 0.13 0.02 0.02
4,2|3 Student’s-t 0.04 11.59 0.03 0.00 0.00
6,4|3 Student’s-t 0.01 11.16 0.01 0.00 0.00
3,1|6 Student’s-t 0.03 8.05 0.02 0.02 0.02
4,5|3,2 Clayton 0.07 0.00 0.03 - 0.00
6,2|4,3 Student’s-t 0.00 7.94 0.00 0.02 0.02
Rotated Joe 270
1,4|6,3 -1.07 0.00 -0.04 - -
degrees
6,5|1,3,2 Student’s-t -0.02 13.16 -0.01 0.00 0.00
Rotated Tawn
1,2|6,4,3 type 1 180 1.92 0.01 0.01 - 0.01
degrees
1,5|6,4,3,2 Joe 1.04 0.00 0.02 0.05 -
Type: R-vine Log likelihood: 248.48 AIC: -446.96 BIC: -320.13
Note: The numbers 1, 2, 3, 4, 5, 6 represent BTC, MSCI, CSI 300, KSE, BSESN, Gold. The types of copula
functions are presented in the second column, showed 'Pair-Copula'. Parameters 1 and 2 are two
parameters applied to define the pair-copula. Upper and Lower show tail dependence. Kendall'τ measures
the similarity of the orderings of the data; the larger the value of τ for the Kendall rank dependence
coefficient, the more significant the dependence among the paired markets.
Table 6. Dynamic connectedness table

BTC MSCI CSI KSE BSESN Gold FROM

BTC 87.70 3.94 1.43 1.56 2.16 3.22 12.30
MSCI 3.27 72.71 5.69 2.57 12.44 3.33 27.29
CSI 3.66 10.41 74.60 3.26 5.73 2.34 25.40
KSE 3.47 4.33 3.88 80.76 4.97 2.59 19.24
BSESN 2.66 14.50 5.23 4.52 70.63 2.46 29.37
Gold 3.29 4.87 2.32 2.56 3.24 83.17 16.29
TO others 16.35 38.05 18.54 14.47 28.55 13.93 129.89
NET 4.05 10.77 -6.86 -4.77 -0.83 -2.36 TCI=21.65%
NPDC 1.00 0.00 4.00 5.00 2.00 3.00
Notes: The TCI is the total connectedness index of the system of all markets. The forecast horizon is 100 days.

Table 7. Results of the vine-copula models in the COVID-19 period

Vine Parameter Parameter

Pair-Copula Kendall' τ Upper Lower
edge 1 2
3|4 Survival Gumbel 1.29 0.00 0.23 - 0.29
3|1 Survival BB8 1.59 0.89 0.16 - -
5|2 BB1 0.33 1.28 0.33 0.28 0.20
3|5 Student’s-t 0.28 4.79 0.25 0.16 0.16
6|3 Independence 0.22 0.00 0.14 - -
5,4|3 Clayton 0.23 0.00 0.10 - 0.05
5,1|3 Gumbel 1.09 0.00 0.08 0.11 -
3,2|5 Frank 1.37 0.00 0.15 - -
6,5|3 Independence - - 0.00 - -
1,4|5,3 Tawn type 1 1.51 0.13 0.08 0.10 -
2,1|5,3 Independence - - 0.00 - -
6,2|3,5 Student’s-t 0.07 7.05 0.05 0.03 0.03
2,4|1,5,
Independence - - 0.00 - -
3
6,1|2,5, Rotated Tawn type
3.41 0.05 0.05 - 0.05
3 1 180 degrees
6,4|2,1,
Independence 3.41 0.05 0.05 - 0.05
5,3
Type: R-vine Log likelihood: 111.3 AIC: -188.61 BIC: -128.34
Note: The numbers 1, 2, 3, 4, 5, 6 represent BTC, MSCI, CSI 300, KSE, BSESN, Gold. The family of copula
models selected for the nine paired markets are showed in the second column, showed 'Pair-Copula'.
Parameters 1 and 2 are two parameters applied to determine the pair-copula model. Upper and Lower
indicate tail dependence. Kendall'τ measures the similarity of the orderings of the data; the larger the value of
τ for the Kendall rank dependence coefficient, the more significant the dependence between the paired
markets.
Table 8. Dynamic Connectedness in COVID-19 Period

BTC MSCI CSI KSE BSESN Gold FROM

BTC 75.07 8.45 3.70 3.37 3.75 5.65 24.93
MSCI 4.18 64.83 6.80 3.43 16.47 4.30 35.17
CSI 5.16 7.33 64.35 9.22 9.53 4.41 35.65
KSE 3.76 5.07 9.00 62.56 15.77 3.84 37.44
BSESN 3.24 14.80 6.72 13.16 59.40 2.68 40.60
Gold 4.86 6.38 3.67 2.54 2.66 79.88 20.12
TO others 21.20 42.04 29.88 31.72 48.20 20.87 193.91
NET -3.73 6.86 -5.77 -5.72 7.60 0.75 TCI=32.32 %
NPDC 3.00 1.00 5.00 4.00 1.00 1.00
Notes: The TCI is the total connectedness index of the system of all markets. The forecast horizon is 100 days.
Figure 1. A plot of daily returns of paired markets

Source: calculations based on R Studio.

Figure 2. Dynamic total connectedness (The forecast horizon is 100 days)

Source: calculations based on R Studio.

Figure 3. Total directional connectedness to others

Source: calculations based on R Studio.

Figure 4. Net total directional connectedness

Source: calculations based on R Studio.

Figure 5. Net pairwise direction network plot of full sample period

Note: The graph shows the net spillover in pairs of directions between all markets in the TVP-VAR
Connectedness model. The colour of the nodes defines whether the market is a net transmitter/receiver of
return spillover. A larger (smaller) node indicates that it is a larger (smaller) source of spillovers in the
system. Green indicates a return spillover transmitter, while red indicates a network receiver. In addition,
the thickness of the line connecting the two nodes and the direction of the arrow show the intensity and
direction of return spillover among each pair of markets. The thicker the line, the stronger the return
spillover.

Source: calculations based on R Studio.

Figure 6. Net pairwise direction network plot during COVID-19

Note: The graph presents the net spillover in pairs of directions between all markets in the TVP-VAR
Connectedness model. The colour of the nodes indicates whether the market is a net transmitter/receiver of
return spillover. A larger (smaller) node indicates that it is a larger (smaller) source of spillovers in the
system. Green indicates a return spillover transmitter, while red indicates a network receiver. In addition,
the thickness of the line connecting the two nodes and the direction of the arrow show the intensity and
direction of return spillover among each pair of markets. The thicker the line, the stronger the return
spillover.

Source: calculations based on R Studio.

Figure 7. Dynamic total connectedness (The forecast horizon is 150 days)

Source: calculations based on R Studio.