Dynamic spillovers and portfolio risk management between defi and metals: Empirical evidence from the Covid-19

Using a novel TVP-VAR approach, we investigate the connectedness between precious metals, industrial metals, and decentralized finance (DeFi) assets during pre-pandemic and Covid sub-periods. We also calculate optimal portfolio weights, hedge ratios, and hedging effectiveness estimates for the portfolios of metals and DeFi assets. Results reveal that the association between DeFi-precious metal and DeFi-industrial metal pairs is weaker compared to the association between traditional precious and industrial metals. The interconnectedness of these markets increased during the Covid-19 period. All DeFi assets, as well as palladium, aluminum, zinc, and Nickel, are net importers of return spillover, while gold, silver, platinum, and copper are net exporters of return spillovers. The return transmission between these markets is rolling, with rapid fluctuations during the Covid-19 period. Finally, the optimal portfolio analysis reveals that adding DeFi assets to the metals-based portfolio is helpful in terms of diversification. These findings are insightful for portfolio managers and policymakers regarding portfolio construction, portfolio adjustment, hedging, and market stability. •We examine the connectedness between DeFi assets and metals during COVID-19.•Connectedness is weak between DeFi assets and precious and industrial metals.•DeFi assets, palladium, aluminum, zinc, and Nickel, are the net recipient of spillover.•Rapid fluctuations in connectedness are noticed during the COVID-19 pandemic.•The addition of DeFi assets in the metals portfolios is helpful for diversification.