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On the stability of stablecoins

Author

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  • Grobys, Klaus
  • Junttila, Juha
  • Kolari, James W.
  • Sapkota, Niranjan

Abstract

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 that drives the volatilities of stablecoins.

Suggested Citation

  • Grobys, Klaus & Junttila, Juha & Kolari, James W. & Sapkota, Niranjan, 2021. "On the stability of stablecoins," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 207-223.
    • Handle: RePEc:eee:empfin:v:64:y:2021:i:c:p:207-223
    DOI: 10.1016/j.jempfin.2021.09.002
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    2. Arthur A. B. Pessa & Matjaz Perc & Haroldo V. Ribeiro, 2023. "Age and market capitalization drive large price variations of cryptocurrencies," Papers 2302.12319, arXiv.org.
    3. Duan, Kun & Urquhart, Andrew, 2023. "The instability of stablecoins," Finance Research Letters, Elsevier, vol. 52(C).
    4. Będowska-Sójka, Barbara & Kliber, Agata, 2022. "Can cryptocurrencies hedge oil price fluctuations? A pandemic perspective," Energy Economics, Elsevier, vol. 115(C).
    5. Briola, Antonio & Vidal-Tomás, David & Wang, Yuanrong & Aste, Tomaso, 2023. "Anatomy of a Stablecoin’s failure: The Terra-Luna case," Finance Research Letters, Elsevier, vol. 51(C).
    6. Yousaf, Imran & Jareño, Francisco & Esparcia, Carlos, 2022. "Tail connectedness between lending/borrowing tokens and commercial bank stocks," International Review of Financial Analysis, Elsevier, vol. 84(C).
    7. Gambarelli, Luca & Marchi, Gianluca & Muzzioli, Silvia, 2023. "Hedging effectiveness of cryptocurrencies in the European stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
    8. Grobys, Klaus & Huynh, Toan Luu Duc, 2022. "When Tether says “JUMP!” Bitcoin asks “How low?”," Finance Research Letters, Elsevier, vol. 47(PA).
    9. Gadzinski, Gregory & Castello, Alessio & Mazzorana, Florie, 2023. "Stablecoins: Does design affect stability?," Finance Research Letters, Elsevier, vol. 53(C).
    10. Łęt, Blanka & Sobański, Konrad & Świder, Wojciech & Włosik, Katarzyna, 2023. "What drives the popularity of stablecoins? Measuring the frequency dynamics of connectedness between volatile and stable cryptocurrencies," Technological Forecasting and Social Change, Elsevier, vol. 189(C).
    11. Sood, Kirti & Singh, Simarjeet & Behl, Abhishek & Sindhwani, Rahul & Kaur, Sandeepa & Pereira, Vijay, 2023. "Identification and prioritization of the risks in the mass adoption of artificial intelligence-driven stable coins: The quest for optimal resource utilization," Resources Policy, Elsevier, vol. 81(C).
    12. Riccardo Blasis & Luca Galati & Alexander Webb & Robert I. Webb, 2023. "Intelligent design: stablecoins (in)stability and collateral during market turbulence," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-23, December.
    13. Jin, Feng & Li, Jingwei & Xue, Yi, 2023. "Preferring stablecoin over dollar: Evidence from a survey of Ethereum platform traders," Journal of International Money and Finance, Elsevier, vol. 131(C).
    14. Matthias Hafner & Marco Henriques Pereira & Helmut Dietl & Juan Beccuti, 2023. "The four types of stablecoins: A comparative analysis," Papers 2308.07041, arXiv.org.
    15. Grobys, Klaus & Dufitinema, Josephine & Sapkota, Niranjan & Kolari, James W., 2022. "What’s the expected loss when Bitcoin is under cyberattack? A fractal process analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    16. Yosuke Kakinuma, 2023. "Hedging role of stablecoins," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 30(1), pages 19-28, January.
    17. Grobys, Klaus, 2023. "Correlation versus co-fractality: Evidence from foreign-exchange-rate variances," International Review of Financial Analysis, Elsevier, vol. 86(C).

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    More about this item

    Keywords

    Bitcoin; Financial technology; Power laws; Spillovers; Stablecoins; Volatility;
    All these keywords.

    JEL classification:

    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • C59 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Other
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G19 - Financial Economics - - General Financial Markets - - - Other

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