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When Tether says “JUMP!” Bitcoin asks “How low?”

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  • Grobys, Klaus
  • Huynh, Toan Luu Duc

Abstract

While stablecoins such as Tether closely track the peg, there is some evidence for recurring spikes in stablecoins’ intraday volatilities rendering stablecoin volatilities unstable (Grobys et al., 2021). Using the Barndorff-Nielsen and Shephard (2006a) methodology, the purpose of our study is to examine whether jumps in Tether have an impact on (subsequent) Bitcoin returns. We retrieve hourly data for Bitcoin and Tether from Bitfinex covering the November 2018 to June 2021 period and encode the binary choice (1 – ‘jump’ and 0 – ‘no jump’) using bi-power variation based on asymptotic distribution theory at 5% significance level for each trading day. Our results show that the joint effect of positive jumps in Tether in association with an 1% increase in Tether returns on the prior day significantly predict negative prices changes in Bitcoin ranging from -3.65% to -8.49% in daily terms. Our results remain robust even after controlling for various other variables.

Suggested Citation

  • Grobys, Klaus & Huynh, Toan Luu Duc, 2022. "When Tether says “JUMP!” Bitcoin asks “How low?”," Finance Research Letters, Elsevier, vol. 47(PA).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pa:s1544612321005778
    DOI: 10.1016/j.frl.2021.102644
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    References listed on IDEAS

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    More about this item

    Keywords

    Bitcoin; Brownian semimartingales; Bipower variations; Cryptocurrency; Granger-causality test; Jumps; Stable coin; Tether;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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