Herd Behaviour in The Cryptocurrency Market: Fundamental vs. Spurious Herding

Chamil W. Senarathne () and Wei Jianguo

The European Journal of Applied Economics, 2020, vol. 17, issue 1, 20-36

Abstract: This paper sets out to explore whether the investor herding in the cryptocurrency market induces correlations in cryptocurrency returns using the methodology of Chang et al. (2000) and Galariotis et al. (2015) from a daily data sampling period of 3/30/2015 to 5/24/2019. The initial regression results show that the cross-sectional absolute deviation of return can only be explained by GSCI oil and gold index return, but no relationship exists between cross-sectional absolute deviation of return and other regression variables, such as return on CCi30, US equity risk premium and US/Euro exchange rate return. The herding regression results under normal market condition show that a strong tendency exists to herd on non-fundamental information that explains cross-sectional absolute deviation of returns. As such, cryptocurrency returns cannot be predicted on the basis of fundamental economic information (e.g., major macroeconomic announcements). Herding on non-fundamental information is found to be more pronounced during an upward-trending period of the market and other than upward-trending period. No signs of herding on fundamental information could be observed under other market conditions. Although the theory suggests that herding on non-fundamental information results in more efficient outcomes, the above findings do not encourage the diversification of traditional assets with cryptocurrency on the basis of low correlation. Since cryptocurrency lacks intrinsic value, the exchange is shown to provide a pseudo-efficient trading platform for speculative investors. Implications for future research are discussed.

Keywords: herd behavior; cryptocurrency; fundamental information; CASD; portfolio diversification; pseudo efficient; intrinsic value (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:sng:ejae01:123

DOI: 10.5937/EJAE17-22053

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