Interlinkage between lending and borrowing tokens and US equity sector: Implications for social finance

Decentralized peer-to-peer social network-based platforms and financial products (i.e., tokens) are emerging phenomena in the area of social finance. This paper explores the return and volatility spillovers between Lending and Borrowing tokens and US equity sectors using the TVP-VAR framework. The results indicate a considerable static return and volatility spillovers between tokens and sectors. Most equity sectors are net transmitters of return and volatility spillovers, whereas tokens are more net receivers. Moreover, our findings show that dynamic return and volatility spillovers vary over time and experience a significant rise during the initial phase of the Russia-Ukraine conflict in the second quarter of 2022. Finally, we explore the portfolio implication of DeFi and find that the hedge effectiveness scores are significantly greater than zero at a 1 % significant level for all optimal weights and hedge ratios of sector/token pairs, suggesting that investors and portfolio managers should consider adding tokens to their equity sector portfolios and adjust the portfolio allocations over time to achieve diversification benefits. This paper explores the association between social finance-based emerging tokens and traditional equity markets, providing insightful information to policymakers and portfolio managers regarding diversification, hedging, and risk management.