Explain the observed decline in stablecoin volatility when interest rates rise

Ascertain the economic and market microstructure mechanisms that cause stablecoin price volatility to decrease following increases in benchmark interest rates (such as the U.S. federal funds rate and Chinese interbank rate), despite simultaneous declines in stablecoin prices and increases in trading volumes documented for stablecoins including Tether (USDT) and USD Coin (USDC).

Background

Empirical results reported in the survey indicate that higher interest rates reduce stablecoin prices and their volatility while increasing trading volumes, a pattern observed for major stablecoins such as USDT and USDC. While the price decline is plausibly attributed to capital reallocations toward interest-bearing instruments, the mechanism behind the volatility reduction is not understood.

Clarifying this mechanism would improve models of stablecoin market behavior under monetary policy shocks and inform risk management and regulatory assessment of stablecoin stability in changing rate environments.