4.7 Article

NFTs and asset class spillovers: Lessons from the period around the COVID-19 pandemic

Journal

FINANCE RESEARCH LETTERS
Volume 47, Issue -, Pages -

Publisher

ACADEMIC PRESS INC ELSEVIER SCIENCE
DOI: 10.1016/j.frl.2021.102515

Keywords

NFT; Return connectedness; COVID-19; Non-fungible tokens; Spillover

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This paper analyzes the connectedness between returns for non-fungible tokens (NFTs) and other financial assets. The study finds that the overall connectedness between the returns for financial assets increased during the COVID-19 period. Static analysis shows that most of the variation in NFT returns is driven by endogenous shocks, with only a small portion influenced by innovation in other assets. Dynamic analysis reveals that NFTs act as transmitters of systemic risk during normal times but shift to absorbers of risk spillovers during stressful times. Therefore, NFTs may provide diversification benefits during turbulent periods.
In this paper, we analyze the connectedness between returns for non-fungible tokens (NFTs) and other financial assets (equities, bonds, currencies, gold, oil, Ethereum) during the period from January 2018 to June 2021. By using the Time-Varying Parameter Vector Autoregressions (TVPVAR) approach, we show that the overall connectedness between the returns for financial assets increased during the COVID-19 period. Our static analysis shows that the behavior of the majority of NFT returns is attributable to endogenous shocks and only a small portion of this variation resulted from the impact of innovation in other assets. The results suggest that NFTs are mainly independent of shocks from common assets classes and even from their close relation, Ethereum. The dynamic analysis across time reveals that during normal times, NFTs act as transmitters of systemic risk to some degree, but during stressful times, their role shifts, and they act as absorbers of risk spillovers. This suggests that NFTs may have diversification benefits during turbulent times, as apparent during the COVID-19 crisis, and especially around the great March 2020 market plunge.

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