Volatility spillovers and portfolio diversification strategies after the 2023 Israel–Hamas conflict

Abstract This study employs time-varying parameter vector autoregressive models in 3-month windows surrounding the 2023 Israel–Hamas conflict to analyze dynamic risk spillovers across diverse global assets. We find a modest postinvasion decrease in overall connectedness, suggesting market segmentation. US stable assets (i.e., the dollar and long-term US bonds) emerge as primary net risk transmitters, while US and European equities become key net receivers. A frequency-based analysis further shows that high-frequency connectedness falls moderately, indicating short-term segmentation, whereas low-frequency connectedness rises marginally, suggesting long-term integration. Crucially, a tail dependence analysis reveals a fundamental shift: postconflict, riskier assets (e.g., fossil fuels, US stocks, and Bitcoin) become the main net transmitters of downside risk, while traditional safe havens become the primary net receivers. Optimal portfolio allocations increase weights in US and European equities, European bonds, and Bitcoin after the invasion. US stocks effectively diversify oil asset exposures, while gold and Bitcoin provide diversification benefits for other financial assets.