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Connectedness between Defi assets and equity markets during COVID-19: A sector analysis
Imran Yousaf1, Francisco Jareño2, Marta Tolentino3
1College of Business and Public Management, Wenzhou-Kean University, Wenzhou, China.
Technological Forecasting and Social Change
|November 21, 2022
Summary
This study examines Decentralized Finance (DeFi) asset and stock market connections during COVID-19. DeFi assets acted as net receivers, while industrial, material, and IT sectors were net transmitters of market shocks.
Area of Science:
- Financial Economics
- Quantitative Finance
- Pandemic Economics
Background:
- The COVID-19 pandemic significantly impacted global financial markets.
- Understanding interdependencies between emerging digital assets like Decentralized Finance (DeFi) and traditional stock sectors is crucial.
Purpose of the Study:
- To investigate the dynamic connectedness between DeFi assets and various stock market sectors.
- To compute optimal portfolio weights and hedge ratios for DeFi-sector equity portfolios during the pandemic.
Main Methods:
- Time-Varying Parameter Vector Autoregression (TVP-VAR) model to analyze dynamic connectedness.
- Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) model to calculate optimal hedge ratios.
Main Results:
- Static connectedness varied by economy and sector.
- Dynamic connectedness revealed significant time-varying spillovers, intensified by the pandemic declaration.
- DeFi assets and some sectors were net receivers of shocks, while industrials, materials, and IT were net transmitters.
Conclusions:
- The study highlights the evolving relationship between DeFi and traditional markets during crises.
- Optimal hedging strategies provide consistent coverage, though costs increased during the COVID-19 crisis.
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