Tail risk connectedness between tokenized and traditional derivatives: Time-frequency analysis and portfolio insights

Abstract

This research explores the tail risk connectedness between tokenized and traditional derivatives while accounting for the portfolio implications. Using a quantile-based spillover approach, we reveal the presence of varying levels of tail risk spillover across different quantiles, with heightened contagion seen during extreme market conditions. We also observe the time-varying patterns of the risk transmission, indicating the influence of market events on the noted interconnectedness, while the VIX and SSR emerge as significant drivers of the tail risk contagion. Additionally, our portfolio analysis reveals the diversification benefits of combining tokenised and traditional derivatives, providing valuable insights for investors seeking to optimise the risk–return trade-offs for different investment horizons.