Decentralized and centralized exchanges: Which digital tokens pose a greater contagion risk?

This study explores the impact of trading activity on both centralized exchanges (CEXs) and decentralized exchanges (DEXs) on information transmission patterns between digital and traditional investment assets. Utilizing a quantile connectedness approach, we analyze the relationships among DEX tokens, CEX tokens, and various assets, including Gold, Oil, Bitcoin, REITs, Equity, Bonds, and the US dollar index. Our results reveal that in the lowest quantile, DEX and CEX tokens primarily receive spillovers, while other assets act as the main transmitters. In contrast, in the upper quantile, DEX and CEX tokens become the primary transmitters of spillovers to other assets. These findings hold significant implications for financial portfolio management, as they demonstrate that during a short squeeze period, DEX-CEX tokens exhibit contagious effects on other assets, diminishing the effectiveness of risk management and portfolio strategies. Furthermore, our study suggests that DEX-CEX tokens serve as optimal hedges for oil, offering a cost-effective alternative for hedging Gold and the USD Index.