Multidimensional information spillover between cryptocurrencies and China’s financial markets under shocks from stringent government regulations

Abstract

This paper investigates the multidimensional spillover effects between cryptocurrencies and China’s financial markets within a time-varying variance decomposition framework. Using the event study method, we examine the impact of China’s stringent regulations on the spillover effects between cryptocurrencies and China’s financial markets. Additionally, we employ multilayer network analysis to uncover interactions among different spillover dimensions. We find that (i) there are significant multidimensional spillover effects between cryptocurrencies and financial markets in China, with cryptocurrencies serving as net transmitters and China’s financial markets as the primary receivers across different dimensions. (ii) The stringent regulations imposed by the Chinese government on the cryptocurrency market significantly impact the information spillover between cryptocurrencies and China’s financial markets in all three dimensions. (iii) Nodes in different layers of the multilayer spillover network have distinct levels of importance and characteristics, so it is essential to consider all possible spillover effects when making investment decisions and managing risks. These findings have important implications for investors when they assess risk and construct diversified portfolios, and for regulators when they formulate policies for risk regulation.