On Stablecoin Price Processes and Arbitrage

A short study using the Caginalp and Balenovic (1999) model for asset flow dynamics to examine fully collateralized stablecoins.

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3 components

	On Stablecoin Price Processes and Arbitrage (pdf)	1.11 M
	On Stablecoin Price Processes and Arbitrage (video)	5 min

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This study applies the Caginalp and Balenovic (1999) model for asset flow dynamics to fully collateralized stablecoins. The analysis provides novel insights on how trend-reversion and reactions to peg deviations work together to keep stablecoin prices close to the price they are targeting. A fixed-effects panel regression indicates that the model’s abstraction of trading motivations indeed fits stablecoin price processes well. The results convey first indication that theoretic stablecoin models might benefit from modeling price dynamics to switch between two market regimes: one for day-to-day price formation and limited arbitrage activity; and one for extraordinary market situations.