Interconnections and contagion among cryptocurrencies, DeFi, NFT and traditional financial assets: Some new evidence from tail risk driven network

For digital assets (cryptocurrencies, DeFi tokens and NFTs) and traditional financial assets such as stock indices and commodities, this paper established a dynamic downside risk network to explore the network aggregating structure, important nodes and the tail risk spillover between asset groups. This study reveals that there exist tail risk spillover between digital financial assets and traditional financial assets, where the risk spillover between the digital assets and the commodities is bidirectional and the risk spillovers from the stocks to the digital assets as well as the commodities to stocks are unidirectional. For important assets, the NFT Decentraland and Brazil’s BVSP stock index play central roles in the network, while the FTSE stock index and gold exhibit strong hedging potential against global downside risk spillovers. Furthermore, we consider the impact of uncertainty in US economic policy and US stock volatility on tail risk contagion, which is the network aggregation level. Regarded as exogenous shocks, the US stock circuit breaker in March 2020 and the US Federal Reserve rate rising in March 2022 were found to significantly increase the tail risk contagion, especially the risk spillover from the stocks market to the digital financial market. Moreover, by using the TVP-SV-VAR model, we find that increases in the US EPU index and the US VIX index can both exacerbate the tail-risk contagion between digital and traditional financial assets. This expands the influencing factors of risk contagion between financial assets. The empirical findings carry important implications not only for portfolio managers and investors in portfolio allocation and investment strategies between digital and traditional financial assets, but also for government regulators in risk management and economic policy formulation.