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Peg instability of USDT: a realized GARCH CoVaR approach

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  • Qihao Chen
  • Zhuo Huang

Abstract

This paper investigates the peg instability of USDT from the tail risk spillover perspective using the CoVaR method. Specifically, we examine whether the conditional quantiles of USDT exhibit significant differences during periods of substantial declines in Bitcoin (BTC) and Ethereum (ETH) prices compared to normal market conditions. Using high-frequency data, we perform a bivariate Realized GARCH estimation of CoVaR and show that incorporating intraday information improves the precision of CoVaR estimation. We first verify that extreme negative returns in BTC and ETH significantly shift the correlation with USDT returns from positive to negative when compared to normal market conditions, indicating that USDT exhibits strong hedging properties and thus is not stable. Using the ΔCoVaR as a measure of the peg instability of USDT, we further detect significant downside to upside risk spillover effects from non-stablecoins (BTC and ETH) to USDT. These empirical findings provide implications for both testing and measuring the peg instability of USDT.

Suggested Citation

  • Qihao Chen & Zhuo Huang, 2026. "Peg instability of USDT: a realized GARCH CoVaR approach," Applied Economics, Taylor & Francis Journals, vol. 58(11), pages 2155-2169, March.
    • Handle: RePEc:taf:applec:v:58:y:2026:i:11:p:2155-2169
    DOI: 10.1080/00036846.2025.2473119
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