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Luojia Youth Economic and Management Forum 401

ThemeThe Crumbling Wall between Crypto and Noncrypto Markets: Risk Transmission through Stablecoins

Lecturer: Yang Ji, Associate Professor, Department of Finance, School of Economics, Xiamen University

Time2022.06.23 14:00

Site: B444 in EMS


The crypto and noncrypto markets used to be separated from each other. We argue that with the rapid development of stablecoins since 2018, risks are now transmitted between the crypto and noncrypto markets through stablecoins, which are both pegged to noncrypto assets and play a central role in crypto trading. Applying copula-based CoVaR approaches, we find significant risk spillovers between stablecoins and cryptocurrencies as well as between stablecoins and noncrypto markets, which could help explain the tail dependency between the crypto and noncrypto markets from 2019 to 2021. We also document that the risk spillovers through stablecoins are asymmetricstronger in the direction from the US dollar to the crypto market than vice versawhich suggests the crypto market is re-dollarizing. Further analyses consider alternative explanations, such as the COVID-19 pandemic and institutional crypto holdings, and determine that the primary channels of risk transmission are stablecoinsUS dollar peg to the noncrypto market and their transaction-medium function in the crypto ecosystem. Our results have important implications for financial stability and shed light on the future of stablecoin regulation.

Introduction to the lecturer:

Yang Ji is an associate professor and doctoral supervisor of the Department of Finance, School of Economics, Xiamen University, and a special researcher at the Digital Finance Research Center of Peking University. In 2017, he received his Ph.D. in Economics from the China Center for Economic Research (CCER), National School of Development, Peking University. His research interests include financial reform and digital finance. He has published dozens of articles in Journal of Banking and Finance, Finance Research Letters, China and World Economy, Economic Research, Management World, Economics (Quarterly), Financial Research, and World Economy. Anonymous reviewer for multiple journals. Won the 2018 Pushan Policy Research Award. In 2021, he will be selected for the National Youth Talent Project.