This paper investigates the volatility processes of stablecoins and their relationship with Bitcoin volatility. It finds that Bitcoin volatility influences the volatilities of stablecoins, which are statistically unstable.
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| Research question | What are the volatility processes of stablecoins and their interdependencies with Bitcoin volatility? |
| Methodology | Novel approach to choose optimal combination for power law exponent and minimum value for volatilities. |
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.
Klaus Grobys et al. (2021). On the stability of stablecoins Journal of Empirical Finance.
@article{grobys2021stabilitystablecoins,
title = {On the stability of stablecoins},
author = {Klaus Grobys and Juha-Pekka Junttila and James W. Kolari and Niranjan Sapkota},
year = {2021},
institution = {Elsevier BV},
journal = {Journal of Empirical Finance},
doi = {10.1016/j.jempfin.2021.09.002},
url = {https://doi.org/10.1016/j.jempfin.2021.09.002},
note = {Indexed by Stablecoin Beat},
}