Volatility & Risk Spillovers Between Stablecoins, Foreign Exchange, & Bonds

Abstract:

This paper investigates the volatility dynamics and risk spillover effects among stablecoins, foreign exchange markets, and bond markets, with a particular focus on emerging and developing economies. While existing research has primarily examined the interdependence of major cryptocurrencies with advanced financial markets, little is known about the systemic linkages involving stablecoins and their interactions with key financial markets in less-developed regions. To address this gap, we employ multivariate GARCH-in-mean models to capture the time-varying relationship between volatility and returns, and to identify channels of shock and volatility transmission. Specifically, we analyze whether stablecoins serve as conduits of financial risk or as hedging instruments in markets characterized by weaker institutional frameworks, higher exchange rate volatility, and more fragile debt markets. Our findings are expected to provide new evidence on the extent to which stablecoin shocks propagate into foreign exchange and bond markets, shaping financial stability in emerging and developing countries. By highlighting the role of stablecoins in global financial linkages, this study contributes to the literature on cryptocurrency–traditional market interactions and offers policy-relevant insights for regulators seeking to manage systemic risks in vulnerable economies.

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Host or Publisher University of Nebraska Omaha Economics