Explanation of the dynamic model of systemic risk contagion of cryptocurrency and world and Iran’s financial markets

Document Type : Research Paper

Authors

1 Phd Student. Department of Financial Management. Islamic Azad University, Central Tehran Branch. Tehran, Iran

2 Assistant Professor, Department of Business Administration, Quds City Branch, Islamic Azad University, Tehran, Iran

3 Professor, Department of Financial Management. Islamic Azad University, Central Tehran Branch. Tehran, Iran

4 Associate Professor, Department of Financial Management. Islamic Azad University, Central Tehran Branch. Tehran, Iran

Abstract

Purpose: The financial contagion phenomenon has been one of the issues of concern all over the world. As globalization increased the financial dependence of different institutions, this relationship was considered as a determinant of financial contagion. Systemic risk in financial terminology means the possibility of a sudden fall in the entire financial system, which can lead to instability or chaos in financial markets. It refers to the possibility of failure in the entire system due to a failure or crisis in a sector or part of the market. This risk is caused by simultaneous movement or correlation among market segments. Another important issue in the discussion of systemic risk is the risk of contagion; which means the possibility of spreading important economic changes in one country to other countries. Contagion is classified into two types, transaction party contagion and information contagion. Each type of contagion in the financial market in question will eventually lead to a systemic risk.
It is not appropriate to use unadjusted correlation to evaluate the different effects of large returns. In the calculation of (unadjusted) correlations, the spread of large returns is hidden because correlations place equal weight on small and large returns. Therefore, having small returns in a large number of days eliminates the effects of large returns in a small number of days. Examining the contagion of cryptocurrencies is essential because it helps the stakeholders to have a better understanding of the systemic risk caused by cryptocurrencies in financial markets and currency markets. In this way, investigating the contagion of cryptocurrencies helps policymakers and participants in currency markets to predict the imminence of widespread risk in their vicinity and, thus, helps them to better manage the risk of cryptocurrencies. The main purpose of this study is to design and explain the dynamic model of systemic risk contagion of cryptocurrency in the financial markets of the world and Iran.
 
Methodology: In order to achieve the main goal of this study, namely to measure systemic risk, the criteria of adverse risk approach including "differential conditional value at risk" (∆CoVaR) and "marginal expected loss" (MES) are used. In addition, to determine the effects of yield contagion and volatility contagion among cryptocurrencies and to determine the effect of the relationship between the yield and volatility of cryptocurrencies with the performance of global financial markets, the multivariable GARCH model will be used, and the MATLAB software will serve to analyze and calculate the research models.
The statistical population of this research is the historical data of the Bitcoin cryptocurrency under the title of cryptocurrency market index and the data of NASDAQ, New York, Toronto, London, Frankfurt, Madrid, Shanghai, Hong Kong, Tokyo, Tehran and Mumbai stock market indices. . In this research, due to the lack of information on the early years of this market and especially the data related to Bitcoin, all the data available in the Coin Market Cap database are used. The data related to financial markets have been used for a period from July 2012 to July 2022.
 
Findings and Discussion: The results obtained from this study indicated that the relationship between the changes in the financial markets were non-linear. In addition, the systemic risk in the virtual currency market was lower than that in the financial markets, which indicates the shallowness of this market. There was also a positive correlation between the systemic risk of Bitcoin and other financial markets, as well as some risk contagion between these financial markets. According to the estimated coefficients in the variance-covariance matrix, risk sharing existed among financial markets. Based on the estimation, the virtual currency market was found as the recipient of the spillover effects, and the shock affected the financial status of other markets.
 
Conclusions and Policy Implications: The aim of the present study was to design and explain the dynamic model of cryptocurrency systemic risk contagion in the financial markets of the world and Iran. Based on the results, it can be suggested that, due to the spread of risk between the virtual currency market and the financial markets in Iran and the world, especially the stock market, investors should consider this issue in their asset portfolios and the assets related to negative covariance. Also, considering the existence of contagion between the virtual currency market and systemic risk in Tehran stock market, the existence of institutional rules and regulations and the existence of a risk warning system can reduce the effects of this risk on the domestic financial market.

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References

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The Journal of Economic Policy
Volume 18, Issue 35
April 2026
Pages 247-271

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