Tail risk connectedness between DeFi and Islamic assets and their determinants

Abstract

This study explores tail risk spillover between DeFi and Islamic assets using a time-frequency domain approach. We also conduct sub-sample analyses to account for the diverse impacts of COVID-19 and the Russian-Ukrainian conflict on financial markets. Recognizing the importance of global factors in financial market interdependencies, this research also assesses their impacts on tail risk connections. Empirical findings reveal varying levels of total connectedness among DeFi assets, sukuk markets, and Islamic equity indexes across different time spans, indicating a moderate but fluctuating degree of integration. DeFi assets generally appear disconnected from sukuk and Islamic stock markets over various periods, with the notable exception of a strong and consistent link between SNX in the DeFi sector and sukuk markets (excluding the Indonesian market) over medium- and long-term durations, suggesting that both DeFi and Islamic assets have hedging capabilities. Additionally, the integration between DeFi and Islamic assets is weaker during the COVID-19 era compared to the Russian-Ukrainian conflict period, with changes in the transmission mechanism. Further analysis identifies several potential predictors of tail risk connectedness between DeFi and Islamic assets. Our findings have significant risk management implications for investors and DeFi companies.