Markets Behaviours Around Frozen Funds Withdrawal: Trading Stranded Assets on FTX

Silicon Valley Bank Bankruptcy and Stablecoins Stability

“…We employ a methodology similar to that used by De Blasis et al ( 2023) and Galati et al (2023), who use a BEKK-GARCH model to find evidence of contagion effects between stablecoins during the Terra token crash (De Blasis et al, 2023) and cryptocurrencies during the FTX collapse (Galati et al, 2023), to test for financial contagion across digital assets. Developed by Engle and Kroner (1995), the BEKK model belongs to the family of multivariate GARCH models used to assess conditional covariances and correlations, thus the interaction between time series, and is preferred over the similar DCC-GARCH model (Caporin & McAleer, 2012).…”

“…Developed by Engle and Kroner (1995), the BEKK model belongs to the family of multivariate GARCH models used to assess conditional covariances and correlations, thus the interaction between time series, and is preferred over the similar DCC-GARCH model (Caporin & McAleer, 2012). Consistent with De Blasis et al ( 2023) and Galati et al (2023), we assume that the logarithmic returns follow a normal distribution with zero means and the variance-covariance matrix 𝐻 𝑡 , so that we can model the conditional covariances as…”

“…As highlighted by De Blasis et al ( 2023) and Galati et al (2023), given the large number of parameters involved when examining numerous time series, the BEKK representation in (1) presents some challenges in the estimation process. To address this, the previous studies mentioned above employ a scalar version of (1) by applying the variance targeting concept to get rid of the term 𝐶𝐶 ′ and therefore reduce the parameters.…”

“…In this scalar version, the parameters are only 𝑎 and 𝑏, subject to 𝑎, 𝑏 > 0 and 𝑎 + 𝑏 < 1. According to De Blasis et al ( 2023) and Galati et al (2023), these constraints are imposed to keep the process stationary and to guarantee the positive definiteness of the covariance matrices.…”

“…In particular, De Blasis et al (2023) similarly analyze the issue of contagion effects in stablecoin markets, albeit it looks at a stablecoin (UST) crash within the market itself. Galati et al (2023), on the other hand, investigate financial contagion across cryptocurrency exchanges, but do so with regards to blockchain technology (FTX) collapse. As such, this study extends both De Blasis et al (2023) and Galati et al (2023) as it enables us to test whether a new dimension of failure (that of a commercial bank) has an impact on cryptocurrency markets.…”