Time-Varying Correlations and Volatility Spillovers Between Cryptocurrencies and Islamic Equity Indices: Indonesia, Pakistan and India

Abstract

This study investigates the co-movements and volatility spillover dynamics between cryptocurrencies and Islamic equity indices in Indonesia, Pakistan and India addresses the scarcity of comparative evidence for these major developing economies. The study examines volatility spillovers and dynamic correlations across markets based on return series from January 4, 2017, to January 4, 2025, employing BEKK-GARCH and DCC-GARCH models. Empirical results reveal a unidirectional transmission of volatility from cryptocurrencies to Islamic equities, except for Ethereum and Pakistan, where a weak bidirectional spillover is observed. The analysis uncovers a time-horizon dichotomy. Short-term spillovers remain limited. Dynamic correlations intensify significantly over the long run. This suggests a growing integration between cryptocurrency assets and Islamic stock markets indices. Cryptocurrencies act as diversifiers in the short run and their role as hedges weakens over the long term. This deeper integration increases the exposure of Islamic financial systems to cryptocurrency-induced risks and may affect overall financial stability. These results highlight the need for regulators and policymakers to closely monitor volatility transmission channels and enhance oversight mechanisms. A clear understanding of these dynamics is essential to mitigate the risk of systemic disruptions and ensure the resilience of Islamic financial markets amid the growing influence of digital assets