On the Stability of Stablecoins

Grobys, Klaus; Junttila, Juha-Pekka; Kolari, James W.; Sapkota, Niranjan

doi:10.2139/ssrn.3764457

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On the Stability of Stablecoins

48 Pages Posted: 4 Mar 2021

See all articles by Klaus Grobys

Klaus Grobys

University of Vaasa; University of Jyväskyla

Juha-Pekka Junttila

University of Oulu - Department of Economics, Accounting and Finance; University of Jyväskylä - Jyväskylä International Macro & Finance Research Group (JyIMaF)

James W. Kolari

Texas A&M University - Department of Finance

Niranjan Sapkota

University of Vaasa

Date Written: January 12, 2021

Abstract

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 in the valuation of stablecoins.

Keywords: Bitcoin, financial technology, power laws, spillovers, stablecoins, volatility

JEL Classification: C19, C49, C59, G10, G15, G19

Suggested Citation: Suggested Citation

Grobys, Klaus and Junttila, Juha-Pekka and Kolari, James W. and Sapkota, Niranjan, On the Stability of Stablecoins (January 12, 2021). Available at SSRN: https://ssrn.com/abstract=3764457 or http://dx.doi.org/10.2139/ssrn.3764457