Dissecting Tether’s Nonlinear Dynamics during Covid-19

Abstract

The present study is on the five cryptocurrency daily mean return time series linearity dynamics during the Covid-19 period. These cryptocurrencies were chosen based on their influence on the market, primarily driven by its market capitalisation. Tether is included as the most important stable coin on the market, nominally pegged to the U.S. dollar (USD). The reason to investigate it is that there are some inconsistencies in its behaviour as opposed to the other four cryptocurrencies. This study found that the behaviour of Tether cryptocurrency daily average return time series pattern is highly nonlinear and chaotic in nature, whereas the other four cryptocurrencies (namely Bitcoin, Ethereum, XRP and Bitcoin Cash) daily average return time series were found to be linear in nature. To further study Tether’s nonlinear time series rich dynamics, this study deployed one category of the regime switching models popularly known as the threshold regressions. The study estimates fairly suggest that both the threshold autoregression (TAR) and smooth transition autoregressive (STAR) models with lag 1 are adequate to capture the rich nonlinear and chaotic dynamics of Tether’s daily average return time series.

COVID-19 Pandemic: Is the Crypto Market a Safe Haven? The Impact of the First Wave

“…Given the growing interest in Bitcoin, it is important to choose a reliable model to forecast the risk of such an investment. By using specifications that can account for structural breaks in GARCH, namely Markov switching GARCH models, the authors of [20] analyzed Bitcoin daily log returns exhibiting regime changes in their volatility dynamics. Because of such dynamics, it is important to explore ways to reduce the level of risk of an investment in Bitcoin and to hedge or discover some factors that can influence the price movement of Bitcoin.…”

Are Cryptocurrencies a Backstop for the Stock Market in a COVID-19-Led Financial Crisis? Evidence from the NARDL Approach

“…All the return series are non-normal as the Jarque-Bera test highly rejects the null of normality, thus justifying the application of the NARDL model, which considers that nonlinearity is due to short-and long-run effects and also due to positive and negative changes. Further, Maiti et al (2020) mentioned about the nonlinearity of the daily return of Tether cryptocurrency. The relationship between these two markets is expected not to be linear because while the crypto markets are unregulated, the stock markets across the world are regulated.…”

Impacts of the global pandemic on returns and volatilities of cryptocurrencies

“…However, Tether was a safe haven during the Covid-19 pandemic. It was the most stable cryptocurrency because it was pegged with U.S. dollar (Maiti et al, 2020). Nasreen et al (2021) examined the interconnection and enclosed opportunities from September 30, 2015, to June 04, 2020, of the top 9 cryptocurrencies where TVP-VAR showed a high degree of interrelatedness.…”

“…Further, they discussed the functioning of the Oracles technology used in blockchain. Maiti et al (2020) examined the behavior of five cryptocurrencies chosen based on the market influence during covid-19 with the help of threshold autoregression (TAR) and Smooth transition autoregressive (STAR) model. They found that Tether's behavior was inconsistent with the other four because the daily average time series pattern was non-linear while linear in the case of the other four.…”