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The immense disruption of financial markets caused by the 2008 financial crisis has exposed the level of integration across different markets and economies around the globe (Kim et al., 2015). This experience has opened up a lot of valid arguments and debates about how returns, including volatility, are spilled over across different equity and commodity markets which are undeniably more complex and overwhelmed with information due to technological developments. However, the primary motivation in the arguments and debates related to market spillovers is anchored on hedging risk and finding a suitable financial asset that will provide a safer haven for investors and market regulators alike.
On the other hand, with the emergence of cryptocurrencies, academics, investors, and policymakers have speculated on the role of bitcoins in financial markets and its possible implications for trading and policies related to the management and regulation of market risk and liquidity (Kyriazis, 2019). Urquhart (2017) added that investors’ growing interest in participating in the Bitcoin market had increased market efficiency and undeniable speculative bubbles. Despite being relatively new, Watcharaporn et al. (2021) argued that the growing interest in cryptocurrency may result in short- and long-term spillovers that are worthy of analysis and evaluation.
While there are several definitions of return spillover, Dewi et al. (2021) referred to it as the transmission of returns between markets primarily due to information transfer. Looking at this subject from the Gulf Cooperation Council (GCC) market expands the analysis to factor in the dependence of spillover effects on the varying market and economic conditions and level of integration and monetary policy. For example, Arouri and Rault (2010) noted that spillover or transmission of price shocks, especially oil-related, should be different in GCC markets compared to relatively oil-importing economies. GCC countries’ economies highly affect their fiscal and monetary policy, leading to a different structural spillover effect. Interestingly enough, other countries in the GCC, like UAE and Bahrain, are more liberal in terms of market and economic policies and are less dependent on oil (Arouri et al., 2011). For example, Bahrain’s more liberal market and economic policies are even more prevalent in its Central Bank’s effort to digitally transform the Kingdom’s financial services (Central Bank of Bahrain, n.d.), leading to a more cryptocurrency-integrated economy.
With the growing interest in the complexity of market spillover on the one hand and the unique economic and monetary policy implications, it is surprising that very few studies have explored the market spillover in the Kingdom of Bahrain. On the other hand, the decentralized nature of blockchain technology provides varying risk and reward characteristics (Urom et al., 2020), which has tremendous implications for investment portfolio management in a thriving economy. In addition, Baker et al. (2020) observed that the recent COVID-19 pandemic had provided another layer to the already challenging aspect of market spillover and financial contagion.
Thus, the contribution of this paper to emerging research can be seen in two folds. First, this study offers fresh empirical evidence on the varying direction of spillover across the Bahrain Stock Market, Bitcoin Market, and other major commodity markets during and before crises. This investigation is crucial in market regulation and policymaking, especially in an economy that intends to expand its involvement in financial technology and diversify outside an oil-based economy. In addition, the unique market condition and level of regional integration in an oil-exporting economy like Bahrain provide more insight into price spillovers since these characteristics were noted to be relevant factors, especially during periods of economic unrest (Arouri et al., 2011). Second, Granger causality statistics paired with the Cholesky variance decomposition allow the structural analysis of the modeled directional shocks. This process results in a more educated and evidence-based approach to developing policies for market regulation and investment and portfolio management.