Unveiling hidden connections: Spillover among BRICS' cryptocurrency-implied exchange rate discounts and US financial markets

Abstract

This study employs connectedness approach based on Time-Varying Parameter Vector Autoregression (TVP-VAR) and Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) methods, to scrutinize the connectedness between the cryptocurrency implied exchange rate discount in BRICS countries (Brazil, Russia, India, China, and South Africa) and US financial markets. Empirical evidence suggests that Bitcoin market volatility substantially influences other markets. Moreover, given the intimate connections between BRICS countries and developed nations such as the US in today's globalized context, fluctuations in the Bitcoin market within BRICS countries are apt to impact US financial markets. Our empirical findings specifically indicate the following: (i) Among the total spillover effects of the cryptocurrency implied exchange rate discount in BRICS countries, Russia exhibits the most potent total spillover effect and contributes the most to market connectedness. (ii) The Brazil directional spillover index is elevated in both spillover relationship categories, and the spillover effect of the cryptocurrency implied exchange rate discount in Brazil on US financial variables is notably pronounced. (iii) Of the US financial variables, the US Financial Stress Index demonstrates the most robust connectedness with the cryptocurrency implied exchange rate discount in BRICS countries and exhibits heightened sensitivity to uncertainty.