Financial stress and cross-asset market spillovers: evidence from a time-varying connectedness framework

Abstract

This study investigates the time-varying interactions between financial stress and selected financial assets within the Diebold–Yilmaz connectedness framework. Using a rolling-window VAR model combined with generalized forecast error variance decompositions, the analysis examines how shock transmission mechanisms across financial markets evolve over time. To assess the role of cryptocurrencies in this structure, the study adopts a comparative approach based on two samples: a long sample excluding Bitcoin (2000–2024) and a subsample including Bitcoin (2010–2024).The empirical findings reveal that overall market connectedness increases sharply during periods of systemic stress, particularly during the 2008 Global Financial Crisis and the COVID-19 pandemic, indicating a pronounced strengthening of cross-market interdependence under crisis conditions. Across both samples, the St. Louis Fed Financial Stress Index (STLFSI) consistently emerges as the strongest net transmitter of risk, highlighting the central role of financial stress in systemic shock propagation. When Bitcoin is included in the system, total connectedness becomes more volatile, and Bitcoin is found to act, on average, as a net transmitter of risk. This result suggests that cryptocurrencies may become integrated into systemic risk transmission mechanisms during periods of heightened uncertainty, challenging the view that Bitcoin functions as an unconditional safe haven. A comparison of the two samples indicates that while Bitcoin does not fundamentally alter long-run average connectedness, it significantly amplifies connectedness dynamics during short- and medium-term stress episodes.Overall, the findings underscore the time-varying and state-dependent nature of financial market interconnectedness and highlight the importance of incorporating financial stress indicators and cryptocurrencies into systemic risk monitoring frameworks. The study contributes to the literature by providing new evidence on the evolving role of financial stress and cryptocurrencies in cross-asset spillover dynamics.