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<p>This study investigates the dynamic volatility spillover architecture between digital assets and sustainable finance instruments, addressing a critical gap at the intersection of climate financial risks and cryptocurrency market integration. Employing the Time-Varying Parameter Vector Autoregression (TVP-VAR) connectedness framework of Antonakakis et al. [<CitationRef CitationID="CR7">7</CitationRef>], we analyze daily returns of 30 assets spanning DeFi tokens (AAVE, Maker), NFT platforms (WAX, Chiliz), foundational cryptocurrencies, and thematic ETFs focused on clean energy and carbon markets (ICLN, CRBN) from January 2020 to April 2025. Our methodological contribution lies in applying TVP-VAR to capture time-varying volatility transmission patterns without arbitrary window selection, providing superior estimation accuracy and reduced outlier sensitivity compared to rolling-window approaches. The empirical findings reveal three key insights: First, the system exhibits a Total Connectedness Index of 76.03%, indicating substantial systemic integration. Second, we identify asymmetric transmission channels: thematic ETFs (KGRN: NET + 36.06; ICLN: NET + 24.54) and infrastructure tokens (Chainlink: NET + 30.35) serve as primary volatility transmitters, while stablecoins (DAI: NET −&#xa0;34.02; USDC: NET −&#xa0;28.61) and certain altcoins (Stacks: NET −&#xa0;75.52) function as shock absorbers. Third, and most critically, cross-sector spillovers between digital assets and sustainable ETFs remain remarkably low (&lt; 2%), creating a distinct informational boundary with significant portfolio diversification implications. Building on the observed cross-sector spillovers and applying mean–variance portfolio optimisation (Markowitz, 1952) over the full sample period, our results suggest that carbon and clean energy ETFs may provide dual benefits: financial diversification through low correlation (enabling 15–20% optimal allocation that minimises portfolio variance while maintaining target returns) and regulatory hedging against carbon-related policy risks inherent in energy-intensive cryptocurrencies. Our results offer quantitative guidance for constructing climate-aligned portfolios that balance innovation exposure with environmental risk management, offering potential guidance for sustainable investment strategies amid evolving climate financial regulation.</p>

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Volatility spillover between digital assets and sustainable finance ETFs using TVP-VAR network analysis

  • 期刊论文

  • 出版模式：

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  • 发表日期：

    2026年7月6日

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  • Samoon Khan,
  • Rupinder Katoch,
  • Caroline Lindah Mphande

摘要

This study investigates the dynamic volatility spillover architecture between digital assets and sustainable finance instruments, addressing a critical gap at the intersection of climate financial risks and cryptocurrency market integration. Employing the Time-Varying Parameter Vector Autoregression (TVP-VAR) connectedness framework of Antonakakis et al. [7], we analyze daily returns of 30 assets spanning DeFi tokens (AAVE, Maker), NFT platforms (WAX, Chiliz), foundational cryptocurrencies, and thematic ETFs focused on clean energy and carbon markets (ICLN, CRBN) from January 2020 to April 2025. Our methodological contribution lies in applying TVP-VAR to capture time-varying volatility transmission patterns without arbitrary window selection, providing superior estimation accuracy and reduced outlier sensitivity compared to rolling-window approaches. The empirical findings reveal three key insights: First, the system exhibits a Total Connectedness Index of 76.03%, indicating substantial systemic integration. Second, we identify asymmetric transmission channels: thematic ETFs (KGRN: NET + 36.06; ICLN: NET + 24.54) and infrastructure tokens (Chainlink: NET + 30.35) serve as primary volatility transmitters, while stablecoins (DAI: NET − 34.02; USDC: NET − 28.61) and certain altcoins (Stacks: NET − 75.52) function as shock absorbers. Third, and most critically, cross-sector spillovers between digital assets and sustainable ETFs remain remarkably low (< 2%), creating a distinct informational boundary with significant portfolio diversification implications. Building on the observed cross-sector spillovers and applying mean–variance portfolio optimisation (Markowitz, 1952) over the full sample period, our results suggest that carbon and clean energy ETFs may provide dual benefits: financial diversification through low correlation (enabling 15–20% optimal allocation that minimises portfolio variance while maintaining target returns) and regulatory hedging against carbon-related policy risks inherent in energy-intensive cryptocurrencies. Our results offer quantitative guidance for constructing climate-aligned portfolios that balance innovation exposure with environmental risk management, offering potential guidance for sustainable investment strategies amid evolving climate financial regulation.