RISK-ADJUSTED RETURNS AND SPILLOVER DYNAMICS AMONG EMERGING DIGITAL CURRENCIES

Zaäfri Ananto Husodo (), Md. Bokthiar Hasan (), Humaira Tahsin Rafia (), Masagus M. Ridhwan (), Gazi Salah Uddin () and Muhammad Budi Prasetyo ()
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Zaäfri Ananto Husodo: Universitas Indonesia, Indonesia
Md. Bokthiar Hasan: Islamic University, Kushtia, Bangladesh
Humaira Tahsin Rafia: Islamic University, Kushtia, Bangladesh
Masagus M. Ridhwan: Bank Indonesia Institute, Indonesia
Gazi Salah Uddin: Linköping University, Sweden
Muhammad Budi Prasetyo: Universitas Indonesia, Indonesia

Journal of Islamic Monetary Economics and Finance, 2025, vol. 11, issue 2, 269-306

Abstract: This study investigates the interconnected dynamics among diverse digital currencies, specifically focusing on risk-adjusted returns, tail risks, dynamic spillovers, and portfolio implications. Unlike prior research, which typically examines individual digital currency classes separately or in limited combinations, our study integrates six distinct classes of digital currencies, namely Islamic gold-backed cryptocurrencies, green cryptocurrencies, gold-backed stablecoins, non-fungible tokens (NFTs), decentralized finance (DeFi) assets, and conventional cryptocurrencies, enabling direct comparisons of risk-return dynamics and systemic interdependencies. Using Value at Risk (VaR), Conditional Value at Risk (CVaR), quantile-based Vector Autoregression (Quantile VAR), and network connectedness analysis, we provide nuanced insights into the behavior of these assets across various market conditions (bullish, bearish, and normal states). Our results demonstrate that conventional cryptocurrencies and DeFi assets consistently deliver positive risk-adjusted returns, whereas Islamic gold-backed cryptocurrencies exhibit notably higher downside risks and negative performance. Spillover analysis reveals pronounced connectedness, particularly in extreme market states, with conventional cryptocurrencies identified as primary transmitters of market shocks and gold-backed stablecoins and Islamic gold-backed cryptocurrencies as recipients. Our findings underscore significant diversification opportunities offered by pairs of assets exhibiting low connectedness, especially in normal market conditions. Furthermore, portfolio optimization analysis highlights the superior hedging effectiveness and lower hedging costs associated with gold-backed stablecoins and conventional cryptocurrency pairs. This comprehensive investigation delivers critical implications for investors, suggesting informed strategies for asset allocation and risk management. Policymakers can also utilize our insights to design adaptive regulatory frameworks that address systemic risks arising from digital currency markets.

Keywords: Digital currency; Tail risks; Dynamic spillovers; Quantile VAR; Portfolio management; Islamic cryptocurrency; Green cryptocurrency (search for similar items in EconPapers)
JEL-codes: C58 F36 G11 G15 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:idn:jimfjn:v:11:y:2025:i:2c:p:269-306

DOI: 10.21098/jimf.v11i2.2771

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