Intelligent design: stablecoins (in)stability and collateral during market turbulence

Riccardo Blasis, Luca Galati, Alexander Webb and Robert I. Webb
Additional contact information
Riccardo Blasis: Marche Polytechnic University
Alexander Webb: University of Wollongong
Robert I. Webb: University of Virginia

Financial Innovation, 2023, vol. 9, issue 1, 1-23

Abstract: Abstract How does stablecoin design affect market behavior during turbulent periods? Stablecoins attempt to maintain a “stable” peg to the US dollar, but do so with widely varying structural designs. The spectacular collapse of the TerraUSD (UST) stablecoin and the linked Terra (LUNA) token in May 2022 precipitated a series of reactions across major stablecoins, with some experiencing a fall in value and others gaining value. Using a Baba, Engle, Kraft and Kroner (1990) (BEKK) model, we examine the reaction to this exogenous shock and find significant contagion effects from the UST collapse, likely partially due to herding behavior among traders. We test the varying reactions among stablecoins and find that stablecoin design differences affect the direction, magnitude, and duration of the response to shocks. We discuss the implications for stablecoin developers, exchanges, traders, and regulators.

Keywords: Stablecoins; Herding; Information cascades; Volatility spillovers; Market crashes; Financial contagion; D47; F31; F61; G14; G41 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://link.springer.com/10.1186/s40854-023-00492-4 Abstract (text/html)

Related works:
Working Paper: Intelligent design: Stablecoins (in)stability and collateral during market turbulence (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:fininn:v:9:y:2023:i:1:d:10.1186_s40854-023-00492-4

Ordering information: This journal article can be ordered from
http://www.springer. ... nomics/journal/40589

DOI: 10.1186/s40854-023-00492-4

Access Statistics for this article

Financial Innovation is currently edited by J. Leon Zhao and Zongyi

More articles in Financial Innovation from Springer, Southwestern University of Finance and Economics
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().