How Tether Depegging Affects Cryptocurrency Returns

ABSTRACT This paper examines the relationship between Tether depegging events and the returns of ten major cryptocurrencies from November 2017 to November 2024. We distinguish between upward and downward deviations from the Tether peg, identifying these events as threshold exceedances based on historical prices, using both constant parameter and rolling‐window frameworks. Our results show that downward depegging events lead to immediate declines in cryptocurrency returns, with the impact typically increasing in severity as the deviation grows. Upward depegging events are also associated with negative effects. Lagged analysis shows that severe downward depegging is often followed by a partial recovery the next day, while lead effects are generally weak, except in cases of large negative depegging. This suggests that markets may begin to price in concerns about Tether's stability ahead of depegging events.