Stablecoins as the cornerstone in the linkage between the digital and conventional financial markets

Abstract

Do stablecoins mean anything to risk management across financial markets? We answer this question by examining the interrelationships between stocks, treasuries, stablecoins, and cryptocurrencies in nonparametric quantile-causality-in-means and quantile-on-quantile regression models. Differently from previous studies of stablecoins’ price volatility, we focus on stablecoins’ trade volumes. The results extend the evidence on stablecoins’ responses to other crypto assets, whose declining returns, through the phenomena designated by us as “flight-to-cryptosafety”, fuel the stablecoins’ market capitalization. Issuance of new stablecoins, because of their backing by conventional safe assets, raises US Treasuries’ demand. And then, decaying Treasury yields cause “flight-to-safety” from stocks to Treasuries. Results from the quantile-based fixed-parameter models are robust to the dynamic connectedness metric based on the time-varying parameter vector auto-regression (TVP-VAR) framework.