Frequency connectedness between DeFi and cryptocurrency markets

Abstract

This study investigates the time-frequency spillovers across main DeFi (AVA, POWR, DOGE, MED, BAT, Link, Maker, and SNX) and four leading cryptocurrency markets (Bitcoin, Ethereum, Litecoin, and Ripple). The results show using the time-domain spillover index of Diebold and Yilmaz (2012) high connectedness across markets, underlying forecasting opportunities. Ethereum and Litecoin are the largest contributors and receivers of spillovers while MED is the lowest contributors of shocks in the system. Using the time-frequency spillover index by Baruník and Křehlík (2018), we show that the spillover at long term is higher than those at the short- and medium terms. BAT, LINK, and LTC are net contributors of spillovers at different time investment horizons while AVA, POWR, DOGE, and MED are net receivers irrespective of the time horizons. For the remaining market, they switch from net receiver to net contributor and vice versa. The major events (COVID-19, COVID-19 vaccination, and Ukraine-Russia tensions) intensify the dynamic of return spillovers at short-, medium-, and long-terms, implying contagion effects and a decline in the diversification benefits.