A1294
Title: Tether depegging events and their relationship with cryptocurrency returns
Authors: Seung Ah Lee - Macquarie University (Australia) [presenting]
George Milunovich - Macquarie University (Australia)
Abstract: This paper examines the relationship between Tether depegging events and the returns of ten major cryptocurrencies over the period from November 2017 to November 2024. We distinguish between upward and downward deviations from Tethers USD 1 parity. These events are defined via threshold-based dummy variables constructed from estimated log-price distributions using both constant-parameter and time-varying (rolling window) frameworks.The analysis is conducted using a series of regression models that incorporate these event dummies as explanatory variables, with and without the inclusion of common cryptocurrency pricing factors. Our results reveal that downward depegging events are associated with immediate, negative, and statistically significant relationships with cryptocurrency returns, with the strength of the relationship increasing with the severity of the depegging threshold. These findings are robust across model specifications, the inclusion of pricing factors, and sample restrictions excluding non-trading days. In contrast, upward depegging events display limited and inconsistent relationships with returns, with few statistically significant estimates. Lagged analyses suggest that severe downward depegging is often followed by a partial reversal in returns the following day. Lead relationships are generally weak or insignificant, indicating limited evidence of anticipatory pricing ahead of depegging episodes.
