Co-movements of NFTs, DeFi tokens and carbon ETFs: nonlinear dynamics and sustainable portfolio implications

What the paper says

Purpose The primary purpose of this research is to empirically analyze the co-movement, nonlinear dynamics, and spillover effects among non-fungible tokens (NFTs) and decentralized finance (DeFi) tokens, carbon exchange-traded funds (ETFs). The study aims to quantify these interactions, especially during major global crises, to derive practical implications for constructing sustainable and diversified investment portfolios. It seeks to provide a quantitative foundation for environmentally conscious investors to navigate the risks and opportunities at the intersection of digital finance and sustainability, addressing a significant gap in the existing literature. Design/methodology/approach This study employs a quantitative approach using advanced econometric models to analyze the daily returns of NFTs, DeFi tokens and Carbon ETFs. The methodology is centered on time-frequency analysis to capture dynamic relationships. Key methods include wavelet coherence (WTC) to identify co-movements across different time scales, partial wavelet coherence (PWC) to isolate direct linkages by controlling for systemic factors and wavelet correlation to examine how these relationships evolve over various investment horizons. This robust framework moves beyond traditional linear models to analyze complex, nonlinear market dynamics. Findings The relationship between digital assets and carbon ETFs is profoundly dynamic, event-driven and frequency-dependent. Co-movements, weak in the short term, intensify dramatically during global crises like the COVID-19 pandemic and geopolitical conflicts. The correlation strengthens progressively as the investment horizon lengthens, indicating carbon ETFs serve as a strong proxy for long-term systemic factors. PWC analysis confirms these are genuine, direct linkages, not merely spurious correlations, highlighting the true interconnectedness of these markets during periods of global instability. Research limitations/implications This study is limited by its focus on a specific set of assets and a defined time period (2020–2024); therefore, findings may not be generalizable to all market conditions or digital assets. The use of CRBN and SMOG as proxies for the carbon market may not capture all nuances of environmental finance. Future research could expand this framework by incorporating other financial markets, such as bonds and commodities, or by applying regime-switching models like SETAR to further explore nonlinear dynamics and enhance the robustness of the findings. Practical implications For environmentally conscious investors, this study provides a quantitative foundation for building climate-aligned portfolios. The findings demonstrate that integrating carbon ETFs into a digital asset portfolio is a sound risk management strategy that enhances diversification and hedges against both market volatility and potential regulatory risks tied to blockchain’s carbon footprint. The results suggest a strategic allocation approach: utilizing stablecoins as portfolio anchors, carefully managing exposure to central shock transmitters and incorporating carbon ETFs for long-term stability and hedging. Social implications This research provides a data-driven roadmap for aligning the burgeoning field of digital finance with pressing sustainability goals. By demonstrating how to construct portfolios that are both financially robust and environmentally responsible, it addresses the significant environmental concerns surrounding blockchain technology. This contributes to a more sustainable financial ecosystem, offering a pathway for investors to participate in innovative digital asset markets while actively managing and hedging against their carbon footprint, thereby promoting greater corporate and social responsibility in finance. Originality/value This paper’s originality lies in its comprehensive empirical analysis of the co-movement and nonlinear dynamics among the specific triad of NFTs, DeFi tokens and carbon ETFs – an intersection that remains largely unexplored. By applying advanced wavelet-based methodologies, the study provides novel, actionable insights into the event-driven and frequency-dependent nature of their interconnectedness. It successfully bridges the gap between digital finance and sustainability, offering a unique, data-driven framework for constructing resilient, next-generation portfolios that are both financially sound and environmentally conscious.