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

Riccardo De Blasis (), Luca Galati, Alexander Webb () and Robert I. Webb ()

Economics & Statistics Discussion Papers from University of Molise, Department of Economics

Abstract: How does stablecoin design affect market behavior in turbulent periods? Stablecoins attempt to maintain a “stable†peg to the US dollar, but do so with wildly varying structural designs. The spectacular collapse of the TerraUSD (UST) stablecoin and linked Terra (LUNA) token in May 2022 precipitated a series of reactions across major stablecoins, with some experiencing falls in value and others gaining value. Using a 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. Implications for stablecoin developers, exchanges, traders, and regulators are discussed.

Keywords: Stablecoins; Herding; Information cascade; Volatility spillovers; Market crashes; Financial contagion (search for similar items in EconPapers)
JEL-codes: D47 F31 F61 G14 G41 (search for similar items in EconPapers)
Pages: 36
Date: 2022-09-28
New Economics Papers: this item is included in nep-mon and nep-pay
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Journal Article: Intelligent design: stablecoins (in)stability and collateral during market turbulence (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:mol:ecsdps:esdp22088

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