On the Stability of Stablecoins
48 Pages Posted: 4 Mar 2021
Date Written: January 12, 2021
This paper investigates the volatility processes of stablecoins and their potential stochastic interdependencies with Bitcoin volatility. We employ a novel approach to choose the optimal combination for the power law exponent and the minimum value for the volatilities bending the power law. Our results indicate that Bitcoin volatility is well-behaved in a statistical sense with a finite theoretical variance. Surprisingly, the volatilities of stablecoins are statistically unstable and contemporaneously respond to Bitcoin volatility. Also, whereas the volatilities of stablecoins are not Granger-causal for Bitcoin volatility, lagged Bitcoin volatility exhibits Granger-causal effects on the volatilities of stablecoins. We conclude that Bitcoin volatility is a fundamental factor in the valuation of stablecoins.
Keywords: Bitcoin, financial technology, power laws, spillovers, stablecoins, volatility
JEL Classification: C19, C49, C59, G10, G15, G19
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