Extreme Return Connectedness Between DeFi Tokens and Traditional Financial Markets: An Entrepreneurial Perspective

Document Type

Book Chapter

Source of Publication

Financial Innovation and Technology

Publication Date

2-16-2024

Abstract

DeFi is seen as an important avenue for new venture creation, especially in the area of raising startup capital. The traditional financial system poses significant obstacles to raising initial funds, especially to vulnerable groups of entrepreneurs, such as female entrepreneurs, ethnic minority entrepreneurs, and entrepreneurs with low average net worth. Considering this challenge between this new market segment and its traditional counterpart, in this study, we examine interactions between traditional finance (TradFi) and DeFi and present evidence from four different industries, including banking, financial services, investment services, and insurance, to account for the extent of connectedness. To enhance the robustness of our findings, we examine various quantiles and attempt to determine the direction of spillovers across the markets. The results show positive net spillovers from traditional finance sectors to the DeFi index. The spillovers are found to be more pronounced in the extreme quantiles, suggesting stronger connectedness during uncertain times compared to tranquil periods. The findings can be attributed to the nascent stage of the DeFi market. For both portfolio investors and entrepreneurs, we suggest closely monitoring the developments in traditional markets to update the portfolio weights in DeFi-related assets and strategies in DeFi-focused initiatives.

ISBN

978-3-031-49514-4, 978-3-031-49515-1

ISSN

2730-969X

Publisher

Springer International Publishing

First Page

31

Last Page

50

Disciplines

Business

Keywords

DeFi, TradFi, Startup Capital, Entrepreneurship, Digital Finance, Return Connectedness, Quantile Vector Autoregression

Indexed in Scopus

no

Open Access

no

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