Stablecoins and Cryptocurrency Returns: Evidence From Large Bayesian VARs

40 Pages Posted: 15 Jun 2020

See all articles by Daniele Bianchi

Daniele Bianchi

School of Economics and Finance, Queen Mary University of London

Luca Rossini

VU University Amsterdam - Department of Econometrics; Ca Foscari University of Venice - Dipartimento di Economia

Matteo Iacopini

Ca Foscari University of Venice

Date Written: May 19, 2020

Abstract

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

Suggested Citation

Bianchi, Daniele and Rossini, Luca and Iacopini, Matteo, Stablecoins and Cryptocurrency Returns: Evidence From Large Bayesian VARs (May 19, 2020). Available at SSRN: https://ssrn.com/abstract=3605451 or http://dx.doi.org/10.2139/ssrn.3605451

Daniele Bianchi (Contact Author)

School of Economics and Finance, Queen Mary University of London ( email )

Mile End Rd
Mile End Road
London, London E1 4NS
United Kingdom

HOME PAGE: http://whitesphd.com

Luca Rossini

VU University Amsterdam - Department of Econometrics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Matteo Iacopini

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

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