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Tail connectedness of DeFi and CeFi with accessible banking pillars: Unveiling novel insights through wavelet and quantile cross-spectral coherence analyses

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  • Ghaemi Asl, Mahdi
  • Ben Jabeur, Sami

Abstract

This study evaluates the interplay between decentralized finance (DeFi) and centralized finance (CeFi) within the realm of inclusive banking by examining their foundational components, namely, alternative finance industry, distributed ledger platforms, and future payment technologies. The alternative finance industry leverages innovative technologies, such as direct lending, crowdfunding, automated wealth management, on-demand insurance, and digital currencies. This feature aligns well with the DeFi principles, and it is also beneficial to CeFi. Distributed ledger platforms offer transparency and security for both DeFi and CeFi, whereas future payment technologies provide user-friendly solutions. This study applies novel wavelet and quantile cross-spectral coherence analyses to obtain nuanced relationship insights. This methodology categorizes crypto finance into the DeFi and broader cryptocurrency ecosystems to facilitate robust comparison with traditional banking. It further delineates democratized banking into alternative financing mechanisms, distributed ledger technologies, and future payment capabilities. Wavelet coherence analysis reveals time–frequency associations, whereas quantile cross-spectral coherence unveils extreme connections under different market conditions. The findings suggest the existence of dynamic relationships between inclusive banking components and various financial infrastructures. These relationships vary across return distributions and time scales. In regular markets, positive associations are seen in yearly and monthly frequency cycles with alternative finance and centralized services exhibiting the strongest linkage. During periods of extremely high returns, CeFi and centralized-decentralized (hybrid) infrastructures exhibit limited interconnectivity with democratized banking. Moreover, DeFi's association with distributed ledger technology is negligible. In bear markets, the strongest positive associations are observed between inclusive access and conventional, hybrid, and decentralized financial systems. These insights provide new perspectives on the dynamics between financial systems during extreme conditions. This study emphasizes the need for adaptive regulation, international cooperation, and a balance between innovation and stability to protect and empower users. Collaboration between academia and policymakers is essential to navigate this evolving landscape and advance democratized banking.

Suggested Citation

  • Ghaemi Asl, Mahdi & Ben Jabeur, Sami, 2024. "Tail connectedness of DeFi and CeFi with accessible banking pillars: Unveiling novel insights through wavelet and quantile cross-spectral coherence analyses," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    • Handle: RePEc:eee:finana:v:95:y:2024:i:pb:s1057521924003569
    DOI: 10.1016/j.irfa.2024.103424
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    More about this item

    Keywords

    Decentralized finance (DeFi); Centralized finance (CeFi); Democratized banking ecosystem; Alternative finance industry; Wavelet and quantile analyses;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O35 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Social Innovation

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