Testing the Market Efficiency of Tether in the Presence of Exchange Breaches as Survivability Shocks

One difficulty in testing the efficient market hypothesis (EMH) is overcoming Fama's (1970) joint hypothesis problem of market rationality and the unknown equilibrium E(R). We exploit the fact that the equilibrium expected rate of return for stablecoins is E(R)=0 and employ traditional market efficiency tests to examine the efficient market hypothesis for Tether. We find that deviations of Tether from a dollar do exhibit significant autocorrelation. Second, we use security breaches of cryptocurrency exchanges as a proxy for “survivability shocks”; our results are more consistent with Lo’s (2004) Adaptive Market Hypothesis (AMH) than the EMH