Abstract:
This study investigates the return spillovers and connectedness between decentralized finance
(DeFi) tokens—AAVE, LINK, MKR, and SNX—and major financial benchmarks including
the S&P 500, Nikkei 225, Euro Stoxx 50, Gold, U.S. Dollar Index (DXY), and 3-Month
Treasury Bills. Using a VAR-based Diebold-Yilmaz framework, this research examines the
magnitude and direction of return transmission across these assets from January 2021 to
December 2024. The methodology includes descriptive statistics, unit root testing, lag
selection, VAR model estimation, and generalized forecast error variance decomposition
(GFEVD) to quantify directional and net spillovers. Additionally, time-varying connectedness
is analyzed using rolling windows of 100 days. The results reveal significant interdependence,
with total spillover indices averaging 48.7% over the sample period, indicating that nearly half
of the forecast error variance in returns is explained by spillovers across assets. Directional
spillovers from DeFi tokens to benchmarks average 12.3%, while spillovers from benchmarks
to DeFi tokens average 15.6%, highlighting a bidirectional transmission. Net spillover effects
show AAVE and LINK as net transmitters (net spillovers of 3.2% and 2.8%, respectively),
whereas S&P 500 and Gold are net receivers (net spillovers of -4.1% and -3.5%, respectively).
Time-varying analysis indicates heightened connectedness, with the spillover index peaking at
67.1% during the Terra-LUNA collapse in May 2022 and 62.4% during the FTX bankruptcy
in November 2022, reflecting DeFi's growing systemic relevance during market stress. This
study contributes to the understanding of financial contagion and portfolio diversification in
the digital asset era. It also offers insights for policymakers and investors regarding the
integration of DeFi tokens into broader financial ecosystems.
