Stablecoins and Cryptocurrency Returns: Evidence From Large Bayesian VARs
40 Pages Posted: 15 Jun 2020
Date Written: May 19, 2020
We study the relationship between the returns on stable-coins and major cryptocurrency pairs within the context of a large Bayesian Vector Auto-regressive (BVAR) model, and contribute to a growing literature that aims at understanding the role of cryptocurrency markets as alternative investments. Methodologically, we propose a global-local hierarchical shrinkage prior to regularize the model parameters and consider key features in cryptocurrency returns such as stochastic volatility and fat tails. The main results show that Tether (USDT), the main stable-coin currently traded, significantly and positively correlates with future returns on major cryptocurrency pairs, conditional on trading volume. A strategy that exploits the exposure to USDT delivers substantial economic gain out-of-sample relative to an equal-weight market portfolio and a buy-and-hold investment in Bitcoin.
Keywords: Stable-coins, Tether, Bitcoin, Investments, Shrinkage Priors, Bayesian VAR
JEL Classification: G11, C58, C11, G17
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