Are Blockchain-based assets connected to classical markets? Volatility spillover and wavelet analysis

Abstract

Following the rise of new blockchain-based assets like NFTs and DeFi tokens, alongside the high demand for cryptocurrencies, investors are altering the construction of their portfolios by not just relying on classical strategies in FOREX, stocks, and commodities markets. To highlight the overall risk transmission between the different segment of the markets, we study the connectedness using VAR and TVP-VAR models at various frequencies. We compare the t-variant components across different scales. This approach allows for the investigation of time-frequency dynamics and the identification of patterns and relationships between these assets. The study will utilize historical data and apply wavelet coherence techniques to analyze the co-movements and dependencies at various time scales. The empirical results indicate a strong correlation between DeFi, other cryptocurrencies, and Bitcoin, while NFTs exhibit independence from nearly all segments of the network. The transmission of shocks between markets depends on time and frequency, with most transmission occurring at short-term frequencies. Dynamic transmission is influenced by crises such as the COVID-19 outbreak. Our findings contribute to the literature on blockchain-based assets by examining the transmission of shocks with established markets. These results are significant for investors in managing their portfolios and making informed decisions by considering their holdings in the classical market. JEL Classification: G11; G14 ; C5 ; C58 ; L86 ; G19