Dynamic Connectedness and Risk Spillovers Between NFTs, Cryptocurrencies and Traditional Currencies: An R 2 Decomposition Approach

Abstract

This article investigates the dynamic connectedness between non-fungible tokens (NFTs), cryptocurrencies and conventional currencies using an innovative approach to R 2 decomposition. We test volatility spillovers and the transmission of shocks across assets by decomposing the connectedness into its contemporaneous and lagged components. The database ranges from March 2020 to December 2023, considering several global situations: the COVID-19 pandemic, the 2021 cryptocurrency bubble, the war in Ukraine and the crash of cryptocurrencies in 2022. Our results suggest that the cryptocurrency and NFTs markets are the primary net volatility emitters, having a significant and immediate impact on the traditional currency market. In contrast, most traditional currencies act as net receivers, primarily adopting a shock-absorbing behaviour rather than shock transmission. The results show that the majority of volatility spillovers are contemporaneous, accompanied by small lagged effects. This research provides important insights into the increasingly essential role of digital assets in the global financial system, particularly regarding their influence on volatility transmission between markets.