Are Indian markets insulated from the impact of cryptocurrencies? Unveiling the volatility linkages through multi-index dynamic multivariate GARCH analysis

Abstract

This paper investigates the dynamic relationships between the volatility of Bitcoin and major Indian stock market indices. Employing a dynamic conditional correlation–generalized autoregressive conditional heteroskedasticity (DCC-GARCH) model, we explore how volatility shocks and information flow influence the correlations between these asset classes. Our findings reveal a key characteristic: volatility spillovers tend to be short-lived, indicated by a relatively low DCC-GARCH parameter (dcca1). This suggests that while a surge in volatility in one market might lead to a temporary increase in correlation with the other, this heightened correlation is unlikely to persist for extended periods. However, the model also highlights a high DCC-GARCH parameter (dccb1), signifying that the correlations themselves are responsive to new information. This implies that volatility linkages can adjust rapidly in response to market events or economic data releases. To enhance accessibility for a broad audience, we translate these findings into economic intuitions. We illustrate how the model can be interpreted through real-world examples, such as the impact of sudden policy changes in India or global market flash crashes. By understanding the short-lived nature of volatility spillovers and the responsiveness of correlations, investors in the Indian markets can make more informed decisions when considering the potential influence of Bitcoin's volatility while contributing to a deeper understanding of the dynamic interactions between cryptocurrency and traditional financial markets in the Indian context.