Do Stablecoin Depegs Matter for Equities? Insights from NIFTY Volatility Modelling

Abstract

Stablecoins constitute the principal settlement instrument of cryptocurrency markets, raising the question of whether a broken peg conveys information to equity markets beyond the crypto sector. Building on multiple studies that have modelled cryptocurrency volatility spillovers into equity markets, this study focuses specifically on whether depegging events represent a distinct transmission channel of risk and information by addressing that question in the Indian context. Employing 1,478 daily observations on the NIFTY 50 index between 31 December 2018 and 31 December 2024, a continuous measure of downside peg deviation is constructed for Tether and USD Coin. As cryptocurrency markets trade continuously whereas the National Stock Exchange does not, the measure records the maximum deviation over the calendar interval since the preceding NSE close and enters the specification with a one-day lag. Conditional volatility is modelled using an exponential GARCH (EGARCH) specification under a Student's t density, which is preferred to symmetric GARCH and threshold GARCH on the Akaike, Schwarz and Hannan-Quinn criteria. The asymmetry parameter is negative and significant at the 1% level (γ = -0.107 and -0.124), indicating that adverse innovations raise Indian equity volatility by more than favourable innovations of equal magnitude, while persistence is high but stationary (β = 0.964 and 0.942). Depeg intensity is statistically insignificant in the baseline specification (p = .380) and reverses sign upon inclusion of a dummy variable for the March-April 2020 market disruption (p = .789). Lagged Bitcoin returns, by contrast, significantly predict next-day NIFTY 50 returns (p < .001). Transmission from cryptocurrency markets to Indian equities therefore operated through returns rather than through stablecoin-specific volatility.