Exploring spillover dynamics between cryptocurrencies, stablecoins and Islamic stocks during crisis: TVP–VAR approach

Purpose This study aims to examine the spillover effects between cryptocurrencies, stablecoins and Islamic stock indices, focusing on their interactions during crises. Islamic stocks have historically been more resilient during crises due to their adherence to Shariah principles. Time-varying parameter vector autoregression (TVP –VAR) method will allow the study to look at the spillover over time. Design/methodology/approach Using the TVP–VAR model, the study analyzes daily return data from January 1, 2018 to September 30, 2024. The data includes Bitcoin (BTC), Ethereum (ETH), Tether (USDT) and large-, mid- and small-cap Islamic stock indices. Findings The findings reveal that cryptocurrencies such as BTC and ETH exert stronger spillover effects on Islamic stock indices compared to stablecoins like USDT). However, Islamic stocks remain largely insulated from crypto spillovers, with any spillovers predominantly flowing from stocks to cryptocurrencies. Large-cap Islamic stocks are more susceptible to cryptocurrency spillovers, whereas mid- and small-cap stocks tend to transmit more volatility to crypto assets. Crises amplify these effects, with COVID-19 causing a sharp but short-lived impact, while the 2022 crypto crash led to more prolonged and intense spillovers, particularly affecting large-cap stocks. Notably, stablecoins exhibited no measurable spillover effects on Islamic stocks during the 2022 crypto crash, reinforcing their role as stabilizers in volatile markets. This reinforces the role of stablecoins and Islamic stocks as a relatively stable investment during crypto-related crises. Practical implications The findings suggest that Islamic stock investors face lower exposure to cryptocurrency crisis volatility. Furthermore, stablecoins could be a valuable addition to Islamic investment portfolios. Originality/value This study expands the limited understanding of how stablecoins influence Islamic stock markets. It adds further depth by examining spillover effects across different market capitalizations.