Prague Economic Papers 2026, 35(2):196-220 | DOI: 10.18267/j.pep.909

How the Terra-LUNA Collapse Reshaped Tether's Role in Crypto Market Volatility

Ekin Tokat ORCID..., Hakki Arda Tokat ORCID...
Ekin Tokat, TOBB University of Economics and Technology, Söğütözü Cad. No: 43, 06560, Ankara, Turkey.
Hakki Arda Tokat (Corresponding author), TOBB University of Economics and Technology, Söğütözü Cad. No: 43, 06560, Ankara, Turkey.

This study examines the evolving role of Tether in cryptocurrency market volatility, particularly in the context of the Terra-LUNA collapse. Using a multivariate asymmetric BEKK-GARCH model, we analyze volatility transmission between Tether's trading volume and the return volatilities of Bitcoin and Ethereum. Unlike prior studies that rely on issuance based measures, we employ trading volume volatility as a proxy for real time stablecoin related liquidity dynamics. The results indicate that, in the pre-collapse period, Tether exhibited a stabilizing association with Bitcoin volatility, consistent with its role as a liquidity buffer. Following the Terra-LUNA collapse, this relationship weakens, while evidence of volatility interaction between Tether and Ethereum becomes more pronounced, although this interaction appears sensitive to the sample definition around the crash. Overall, the findings highlight the asset specific and time varying nature of stablecoin related volatility dynamics and underscore how major systemic events can reshape liquidity and volatility transmission within the cryptocurrency markets. The study provides useful insights for regulators and investors as crypto assets become more integrated into traditional financial systems.

Keywords: Tether, Bitcoin, Ethereum, Volatility spillover, Multivariate GARCH models.
JEL classification: C32, G1, G12

Received: November 15, 2025; Revised: February 10, 2026; Accepted: February 23, 2026; Prepublished online: June 18, 2026; Published: June 22, 2026  Show citation

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Tokat, E., & Tokat, H.A. (2026). How the Terra-LUNA Collapse Reshaped Tether's Role in Crypto Market Volatility. Prague Economic Papers, 35(2), 196-220. doi: 10.18267/j.pep.909
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