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Tail connectedness between lending/borrowing tokens and commercial bank stocks

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  • Yousaf, Imran
  • Jareño, Francisco
  • Esparcia, Carlos

Abstract

This paper explores a fresh topic about the tail connectedness between decentralized- lending/borrowing tokens and centralized-commercial bank stocks, regarded as substitutes. Using the methodological approach proposed by Ando et al. (2022), we compare connectedness results at extreme (lower and upper) quantile levels. DeFis and traditional bank stocks may show positive but low spillovers, thus DeFi lending tokens would constitute a new commercial banking asset class. In addition, the tails of the distribution would show excess return (static and dynamic) spillover compared to the mean and median, indicating an increased sensitivity in the extreme market conditions (such as the COVID-19 pandemic), especially in the left tail. The dynamic net spillovers may vary over time for all markets and increase during periods of uncertainty, in line with very recent studies. Also, RTD (Relative Tail Dependence) rejects quasy-symmetry due to its time-variation, ranging between positive and negative values. Therefore, traders and portfolio managers would need to adjust their positions depending on the time-varying net spillovers.

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  • Yousaf, Imran & Jareño, Francisco & Esparcia, Carlos, 2022. "Tail connectedness between lending/borrowing tokens and commercial bank stocks," International Review of Financial Analysis, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:finana:v:84:y:2022:i:c:s1057521922003672
    DOI: 10.1016/j.irfa.2022.102417
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    More about this item

    Keywords

    DeFi-assets; Bank stocks; Connectedness; COVID-19 pandemic crisis;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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