We present the first analysis to date of the connectedness of returns for NFTs and other financial assets.
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Overall connectedness increased during the COVID-19 crisis and the 2018 market crash.
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NFTs are mainly independent of shocks from other assets classes.
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Apart from NFTs, Ethereum transmits systemic risk during COVID-19 outbreak.
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NFTs absorbed risk during the outbreak of COVID-19 similar to that of gold and the USD index.
Abstract
In this paper, we analyze the connectedness between returns for non-fungible tokens (NFTs) and other financial assets (equities, bonds, currencies, gold, oil, Ethereum) during the period from January 2018 to June 2021. By using the Time-Varying Parameter Vector Autoregressions (TVP-VAR) approach, we show that the overall connectedness between the returns for financial assets increased during the COVID-19 period. Our static analysis shows that the behavior of the majority of NFT returns is attributable to endogenous shocks and only a small portion of this variation resulted from the impact of innovation in other assets. The results suggest that NFTs are mainly independent of shocks from common assets classes and even from their close relation, Ethereum. The dynamic analysis across time reveals that during normal times, NFTs act as transmitters of systemic risk to some degree, but during stressful times, their role shifts, and they act as absorbers of risk spillovers. This suggests that NFTs may have diversification benefits during turbulent times, as apparent during the COVID-19 crisis, and especially around the great March 2020 market plunge.
