Libra or Librae? Basket Based Stablecoins to Mitigate Foreign Exchange Volatility Spillovers

24 Pages Posted: 13 Mar 2020 Last revised: 20 Mar 2020

See all articles by Paolo Giudici

Paolo Giudici

University of Pavia

Thomas Leach

University of Pavia - Department of Economics and Management

Paolo Pagnottoni

University of Pavia - Department of Economics and Management

Date Written: March 1, 2020

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 first find 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 findings 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).

Keywords: Cryptocurrencies, Fintech, Stablecoins, Spillover, Variance Decomposition

JEL Classification: C44, C45, C58, G23

Suggested Citation

Giudici, Paolo and Leach, Thomas and Pagnottoni, Paolo, Libra or Librae? Basket Based Stablecoins to Mitigate Foreign Exchange Volatility Spillovers (March 1, 2020). Available at SSRN: https://ssrn.com/abstract=3546779 or http://dx.doi.org/10.2139/ssrn.3546779

Paolo Giudici (Contact Author)

University of Pavia ( email )

Corso Strada Nuova, 65
27100 Pavia, 27100
Italy

Thomas Leach

University of Pavia - Department of Economics and Management ( email )

Strada Nuova, 65
Pavia, 27100
Italy

Paolo Pagnottoni

University of Pavia - Department of Economics and Management

Via San Felice 7
Pavia, 27100
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
47
Abstract Views
298
PlumX Metrics