On the stability of stablecoins

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

Journal of Empirical Finance, 2021, vol. 64, issue C, 207-223

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.

Keywords: Bitcoin; Financial technology; Power laws; Spillovers; Stablecoins; Volatility (search for similar items in EconPapers)
JEL-codes: C19 C49 C59 G10 G15 G19 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:64:y:2021:i:c:p:207-223

DOI: 10.1016/j.jempfin.2021.09.002

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