article · Financial Innovation
This research assesses the linkages between prominent cryptocurrencies and non-fungible tokens across varying market states using a time-varying parameter vector autoregression approach. The findings demonstrate that connectedness increases significantly during extreme market conditions compared to normal, median states. Major cryptocurrencies, specifically Bitcoin, Bitcoin Cash, Ethereum, and Litecoin, consistently function as net transmitters of spillovers to non-fungible tokens under normal, bearish, and bullish environments. During market extremes, the overall spillover pattern simplifies into a direct flow from these cryptocurrencies to non-fungible tokens. Furthermore, the analysis reveals that no other digital asset markets effectively mitigate the risks associated with Bitcoin, but holding Bitcoin can serve to reduce the investment risks inherent in other digital assets.
Understanding how financial shocks move across digital asset markets helps participants navigate volatile conditions. Because major cryptocurrencies drive market movements in non-fungible tokens, especially during market peaks and downturns, these findings provide clearer expectations about how risks spread. This knowledge supports better-informed decision-making for those managing digital asset exposure.
The findings provide analytical insights directly applicable to portfolio design, hedging, and risk management strategies. Potential users include digital asset investors, fund managers, and financial market participants looking to construct diversified digital portfolios. As an empirical financial analysis, the work offers ready-to-use insights for quantitative investment strategies, though specific commercial software or algorithmic tool development is not detailed in the abstract.
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Abstract We analyze the connectedness between major cryptocurrencies and nonfungible tokens (NFTs) for different quantiles employing a time-varying parameter vector autoregression approach. We find that lower and upper quantile spillovers are higher than those at the median, meaning that connectedness augments at extremes. For normal, bearish, and bullish markets, Bitcoin Cash, Bitcoin, Ethereum, and Litecoin consistently remain net transmitters, while NFTs receive innovations. However, spillover topology at both extremes becomes simpler—from cryptocurrencies to NFTs. We find no markets useful for mitigating BTC risks, whereas BTC is capable of reducing the risk of other digital assets, which is a valuable insight for market players and investors.
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DOI: 10.1186/s40854-023-00586-z
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