Dynamic connectedness, spillovers and hedging effectiveness among Islamic, green, derivative and meme tokens and thematic ETFs during global crises

Abstract

This study aims to examine the transmission of return and volatility shocks between niche digital tokens and thematic Exchange Traded Funds (ETFs) during concurrent global crises over 2022–2025. It focuses on Islamic gold-backed tokens, derivative tokens, green energy tokens and meme tokens, alongside Shariah ETFs, derivative-based ETFs, sentiment ETFs and anti-Shariah ETFs. The study investigates time-varying connectedness, identifies persistent net transmitters and receivers and evaluates whether ethically screened or theme-based investment instruments can provide effective hedging and diversification benefits during periods of heightened geopolitical and financial stress. The findings aim to enhance understanding of cross-market risk transmission and portfolio resilience. Based on daily global data from January 2022 to October 2025 for 15 representative assets, this research uses a time-varying parameter-vector autoregressive (TVP-VAR) extension of the connectedness framework for estimation of total, directional and net spillovers between returns and volatility in terms of their interconnection without use of rolling windows. Core-periphery patterns in assets are captured using network visualizations. For practical implementation of the concept of connectedness, dynamic conditional correlation generalized autoregressive conditional heteroskedasticity (DCC-GARCH) models are used to derive dynamic conditional covariances, optimal portfolio weights, hedge ratios and hedge effectiveness of selected ETF-token combinations Results show volatility-driven contagion and a distinct core-periphery network structure. Islamic gold-backed and derivative/DeFi coins continue to rank as the main net transmitters of return and volatility spillovers, especially in the context of the Russia–Ukraine war, the 2023 banking crisis, and ensuing geopolitical and tariff concerns. On the other hand, Halal, sentiment and anti-Sharia ETFs tend to be net absorbers of shocks within the system. Overall connectedness is observed to increase significantly in crisis episodes, while volatility connectedness consistently surpasses return connectedness, validating the importance of second moment risks. Findings on hedging indicate that Islamic token-Halal ETFs hedge more effectively. From an investor’s perspective, the results confirm the use of dynamic and state-dependent rebalancing as opposed to static diversification among thematic investments. In times of crisis, portfolios that seek to hedge must consider the use of Islamic gold-backed token-Halal ETF pairs because they have greater hedging efficiency and stability in hedge ratios. Derivative and meme tokens need to be strategically held and managed because they transmit volatility and have poor hedging performance. From a Shariah-based wealth management perspective, the strategic allocation of Islamic digital tokens with Halal ETFs can strengthen investment portfolios. The current study attempts to develop the first unified multivariate multiaction analysis of the relationship between Islamic gold, derivative/DeFi, green-energy and meme tokens with the ETFs on four themes, including the anti-Shariah ETFs, spanning the period of 2022–2025. In terms of methodology, the research goes a step ahead from the traditional spillover research by combining TVP-VAR extended joint connectedness with DCC-GARCH-based optimal portfolio weight, hedge ratio and hedging effectiveness approach. The current research makes an important contribution to the contagion and ethical finance literature by considering faith and sentiment-based interaction in crisis periods.