What Drives Herding Behavior in the Cryptocurrency Market?

Abstract

This paper uses the cross-sectional absolute deviation (CSAD) in static and time-varying versions to examine herding in the cryptocurrency market from April 2013 to November 2019. Results from the static model confirm the evidence of an anti-herding behavior over the considered period. However, the time-varying analysis suggests the presence of herding behavior around the end of 2013 and persists until the end of the sample period. Furthermore, by examining the factors relating to market microstructure and general economic conditions that can drive herding, we find that the level of herding in the cryptocurrency market rises as volatility, the S&P500, and the dollar index increase. However, the rise in the trading volume, gold price, and the economic policy uncertainty index (EPU) reduce the herding in the cryptocurrency market.

Keywords:

• Time-varying herding
• Cryptocurrencies
• S&P500
• Economic policy uncertainty
• Volatility

JEL CLASSIFICATION:

• G10
• G15
• G40

Notes

1 Hwang and Salmon (2004) propose the beta-herding state space as a methodology to detect herding in the US and South Korean stock markets.

2 Arjoon and Bhatnagar (2017) test herding behavior and its determinants in the Trinidad and Tobago Stock Exchange.

3 By using the static approach Ballis and Drakos (2020), Kallinterakis and Wang (2019) and Kaiser and Stöckl (2020) provide evidence of herding in the cryptocurrency market.