When market boundaries weaken: Network reconfiguration and regime-dependent cross-asset spillovers

Abstract

Cryptocurrencies are increasingly adopted as investment assets, making their interactions with traditional financial markets central to cross-asset diversification and systemic risk. This paper studies the integration of cryptocurrencies, fiat currencies, and S&P500 equities using a balanced panel of 381 assets from October 2017 to February 2024. We combine rolling correlation networks, community structure, market-specific and system-wide Turbulence Indices, and VAR-based connectedness analysis to examine how market stress, network structure, and shock transmission vary across financial regimes. The results show that cross-asset integration is episodic. In calm periods, the three asset classes remain relatively segmented, whereas under stress, local clustering increases, modular separation weakens, and communities become more compositionally mixed across asset classes. Connectedness analysis further shows that regime shifts alter the structure of transmission rather than simply increasing spillover magnitudes. In high-turbulence states, fiat-market turbulence becomes the dominant propagation channel, while network clustering and modularity play a greater role in transmitting forecast uncertainty. These findings support the interpretation of network structure as an emergent, state-dependent transmission layer rather than a persistent exogenous driver of turbulence. The results highlight the need for regime-aware risk monitoring, since full-sample connectedness estimates can understate the cross-asset coupling that emerges precisely when diversification benefits are most fragile.