Stablecoins and cryptocurrency returns: What is the role of Tether?

50 Pages Posted: 15 Jun 2020 Last revised: 27 May 2021

See all articles by Daniele Bianchi

Daniele Bianchi

School of Economics and Finance, Queen Mary University of London

Luca Rossini

University of Milan; Ca Foscari University of Venice - Dipartimento di Economia

Matteo Iacopini

VU University Amsterdam - Department of Econometrics

Date Written: May 19, 2020

Abstract

We study the cross-sectional interdependence between returns on cryptocurrency pairs and deviations of Tether USD from its parity to the U.S. dollar. Methodologically, we propose a large-scale Bayesian Vector Autoregressive (BVAR) model which features a global-local shrinkage prior for cross-pairs return correlations. Empirically, we show that deviations from the USDT/USD parity significantly and positively correlate with future returns on cryptocurrency pairs, conditional on both aggregate and asset-specific trading activity. A simple long-only rotational investment strategy which exploits the exposure to the lagged USDT/USD deviations outperforms out-of-sample passive benchmark investments in Bitcoin and a value-weighted market index.

Keywords: Stablecoins, Tether USD, 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: What is the role of Tether? (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 Road
London, London E1 4NS
United Kingdom

HOME PAGE: http://whitesphd.com

Luca Rossini

University of Milan ( email )

Via Festa del Perdono, 7
Milan, 20122
Italy

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

Cannaregio 873
Venice, 30121
Italy

Matteo Iacopini

VU University Amsterdam - Department of Econometrics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

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