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Libra or Librae? Basket based stablecoins to mitigate foreign exchange volatility spillovers

Author

Listed:
  • Paolo Giudici

    () (Università di Pavia)

  • Thomas Leach

    () (Università di Pavia)

  • Paolo Pagnottoni

    () (Università di Pavia)

Abstract

The paper aims to assess, from an empirical viewpoint, the advantages of a stablecoin whose value is derived from a basket of underlying currencies, against a stablecoin which is pegged to the value of one major currency, such as the dollar. To this aim, we ?rst ?nd the optimal weights of the currencies that can comprise our basket. We then employ volatility spillover decomposition methods to understand which foreign currency mostly drives the others. We then look at how the stability of either stablecoin is affected by currency shocks, by means of VAR models and impulse response functions. Our empirical ?ndings show that our basket based stablecoin is less volatile than all single currencies. This results is fundamental for policy making, and especially for emerging markets with a high level of remittances: a librae (basket based stable coin) can preserve their value during turbolent times better than a libra (single currency based stable coin).

Suggested Citation

  • Paolo Giudici & Thomas Leach & Paolo Pagnottoni, 2020. "Libra or Librae? Basket based stablecoins to mitigate foreign exchange volatility spillovers," DEM Working Papers Series 183, University of Pavia, Department of Economics and Management.
  • Handle: RePEc:pav:demwpp:demwp0183
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    : Cryptocurrencies; Fintech; Stablecoins; Spillover; Variance decomposition.;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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