Price deviation in the stablecoin market and lead-lag relationships in the traditional cryptocurrency market

Abstract

This thesis offers new insights on the exogenous and endogenous drivers of volatility and price deviation of fiat-collateralized stablecoins across centralized exchanges. It further investigate the high-frequency lead-lag effects across centralized exchanges and non-stable cryptocurrencies. Different empirical strategies are employed to explore and understand the complex mechanism regarding stablecoin volatility and mispricings, and the information transmission reflected in the high-frequency lead–lag relationships among cryptocurrencies.
Chapter 2 identifies external drivers of stablecoin volatility, and characterizes the volatility spillover effects from external markets to stablecoins. Using a popular volatility spillover measure combined with a Time-Varying Parameter Vector Auto- Regression (TVP-VAR) model, we estimate directional spillover effects from traditional cryptocurrencies market (i.e., Bitcoin and Ethereum), traditional currency market (i.e. the USD index), and mainstream equity market (S&P 500) to four leading stablecoin markets. Our results indicate that the volatility spillovers from these markets to stablecoins are significant, and largely depend on market conditions. These significant volatility spillovers challenge the previous view of stablecoins as safe haven against non-stable cryptocurrencies and traditional assets. Robustness exercise using an alternative model generally supports our claim. Our findings provide insightful implications for maintaining stablecoin price stability during periods of high uncertainty and trading strategies relying on the stability of stablecoins.
Chapter 3 examines the cross-exchange mispricing of stablecoins that creates arbitrage opportunities. Drawing on snapshots of limit order-book and trade data for USDT and USDC from three leading centralized exchanges, we demonstrate that such mispricing is both prevalent and persistent. Its persistence and profitability suggest that it remains exploitable across exchanges. Further analysis using market characteristics and impulse-response functions (IRFs) indicates that microstructure factors – such as order imbalance, bid–ask spreads, and market depth – together with asynchronous price across exchanges, may drive these deviations. This chapter presents the first empirical study of cross-exchanges mispricings and arbitrage in stablecoins, offering novel insights into market microstructure and highlighting a potential arbitrage pathway for market participants, with implications for reducing price deviations and enhancing market efficiency.
Chapter 4 investigates high-frequency lead-lag relationships across trading venues and assets in the cryptocurrency market. Using tick-by-tick limit order-book data, we confirm the presence of rapid lead–lag dynamics both between cryptocurrencies within the same exchange and across exchanges for the same cryptocurrency. Notably, in contrast to existing literature with lower-frequency data, our results reveal that Bitcoin often assumes a lagging position in high-frequency relationships. Further analysis of order-book behaviour suggests this lag may be linked to Bitcoin’s relatively high resilience of limit order-book. An intraday examination uncovers strong seasonal patterns, showing that lead–lag effects weaken during the opening hours of the US stock market. This implies that disequilibrium in information transmission between cryptocurrency exchanges decreases when investor activity – particularly in the US – intensifies.
Collectively, the findings from this thesis deepen our understanding of market dynamics and microstructure inefficiencies surrounding stablecoins and the broader cryptocurrency ecosystem. They offer important implications for the design of stablecoins, the formulation of trading strategies, and the development of policy frameworks aimed at ensuring stability and efficiency in digital-asset markets.

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Identifiers

ORCID for Guanyu Long: orcid.org/0009-0000-3545-2048

ORCID for Frank McGroarty: orcid.org/0000-0003-2962-0927

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