The Stability of Islamic Cryptocurrencies and Copula-Based Dependence with Alternative Crypto and Fiat Currencies

Abstract

Purpose — This study aims to examine Islamic cryptocurrencies and their dependency on foreign exchange markets in vine copula architecture (CD-Vine) and provide a framework for detecting complex dependence structures, risk management implications, and hedging effectiveness. Design/Methodology/Approach — This study used gold-backed cryptocurrencies and three fiat currencies. The vine copula approach was preferred because it applies several distributions and estimates complex dependencies. Hedging effectiveness was measured by constructing simulation-based portfolios optimised with DCC-t-Copula. Benford’s law and realized variance were used to determine the stability of Islamic cryptocurrencies. Findings — According to C-Vine and D-Vine copula models, paper money has a weak tail dependence with gold-backed cryptocurrencies. Only OneGram coin, whose volatility matched the risk of Bitcoin, showed zero irregularities in volume trading. The findings were robust to different estimations based on Minimum Spanning Tree and Dendrogram. Originality/Value — This is the first study to examine Islamic cryptocurrencies’ stability and the significance of hedging effectiveness on gold-backed cryptocurrencies under a copula-based approach. Research Limitations — The study did not apply time-varying vine copula. Practical Implications — The risk management perspective shows insignificant hedge effectiveness in the portfolio of fiat and gold-backed cryptocurrencies.