Volatility and return spillovers among US traditional technology stocks, decentralized finance instruments and conventional cryptocurrencies: implications for portfolio optimization

PurposeThis study investigates volatility and returns spillovers among US technology stocks, decentralized finance (DeFi) tokens and conventional cryptocurrencies, while also examining strategies for optimal portfolio allocation.Design/methodology/approachThe study analyses daily financial market data from October 05, 2020 to February 09, 2024 by employing the Diebold and Yilmaz (2012) and dynamic conditional correlations generalized auto-regressive conditional heteroscedasticity (DCC-GARCH) models.FindingsEmpirical findings showed that the US technology stocks were highly interconnected both in returns and volatilities (same as the crypto assets), while technology stock-crypto asset market connections were quite low. Moreover, the technology stocks (crypto assets) were generally net volatility and return receivers (transmitters). Overall, market connectedness was high (65.6% for volatility and 77.2% for return). Portfolio optimization results showed that technology stock-crypto asset (all-DeFi, all-cryptocurrency, all-technology stock and DeFi-cryptocurrency) portfolios were attractive to risk-averse (risk-neutral and risk-seeking) investors.Originality/valueThis is the first study to comprehensively analyze volatility and return connectedness and provide insights into portfolio optimization across traditional technology, DeFi and cryptocurrency markets. The insights from this study will aid in risk management, optimal portfolio diversification and formulation of regulations and policies to promote market stability.