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Dynamic DeFi-G7 stock markets interactions and their potential role in diversifying and hedging strategies

Author

Listed:
  • Carlos Esparcia

    (Universidad de Castilla-La Mancha - Campus de Albacete)

  • Tarek Fakhfakh

    (University of Sfax: Universite de Sfax)

  • Francisco Jareño

    (Universidad de Castilla-La Mancha - Campus de Albacete)

  • Achraf Ghorbel

    (University of Sfax: Universite de Sfax)

Abstract

This study examines the link between stocks and decentralized finance (DeFi) in terms of returns and volatility. Major G7 exchange-traded funds (ETFs) and various highly traded DeFi assets are considered to ensure the robustness of the empirical experiment. Specifically, this study applies the vector autoregression generalized autoregressive conditional heteroskedasticity (VAR-GARCH) model to examine the information transmission of these two markets on a two-way basis and the dynamic conditional correlation (DCC)-GARCH model to assess the bivariate correlation structure between each DeFi and ETF pair. The volatility spillover analysis proves a contagion effect occurred between different geographic markets, and even between markets of different natures and typologies, during the most turbulent moments of the COVID-19 crisis and the war in the Ukraine. Our results also reveal a weak positive correlation between most DeFi and ETF pairs and positive hedge ratios that approach unity during turbulent times. In addition, DeFi assets, except for the Bazaar (BZR) Protocol, can offer diversification gains when included in financial investment portfolios. These results are particularly relevant for portfolio managers and policy-makers when designing investment strategies, especially during periods of financial crisis.

Suggested Citation

  • Carlos Esparcia & Tarek Fakhfakh & Francisco Jareño & Achraf Ghorbel, 2024. "Dynamic DeFi-G7 stock markets interactions and their potential role in diversifying and hedging strategies," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-26, December.
    • Handle: RePEc:spr:fininn:v:10:y:2024:i:1:d:10.1186_s40854-024-00618-2
    DOI: 10.1186/s40854-024-00618-2
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    More about this item

    Keywords

    Volatility spillovers; Dynamic correlations; DeFi; G7 ETF; Diversification strategies;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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