Herding Behavior in Crypto currency Markets: Evidence, Drivers, and Implications for Market Efficiency
Contributors
- Daud Bilal Lecturer, Department of Business Administration, National College of Business Administration & Economics (AlHamra University), Sub-Campus Multan, Punjab, Pakistan.
- Dr. Farah Naz Assistant Professor, Department of Business Administration, National College of Business Administration & Economics (AlHamra University), Sub-Campus Multan, Punjab, Pakistan.
- Rohail Pasha Lecturer, Department of Business Administration, National College of Business Administration & Economics (AlHamra University), Sub-Campus Multan, Punjab, Pakistan.
Abstract
Crypto currencies have the conditions needed for herding behavior such as high volatility, weak regulation, information asymmetry, and a large number of retail investors, all of whom have their own information and analysis for trading. This study focuses on understanding the presence, the strength and its asymmetry in herding behavior and the market condition where herding is most prominent. We examined daily return data of a portfolio of major crypto currencies using the cross sectional absolute deviation (CSAD) methodology of Chang et al. (2000) an extension of the cross sectional standard deviation (CSSD) methodology of Christie and Huang (1995) under the premise of nonlinear regression with the test whether the dispersion of returns is decreasing or increasing as the market returns become more extreme. Sub-sample analysis was performed during period of extreme market movement, high volumes of trading and increased investor sentiment. The results, consistent with the general empirical literature, confirm the presence of a statistically significant herding effect in crypto currency markets, with herding being stronger during the periods of sharp downtrend and high volatility, and weaker during the periods of high prices and low volatility. Herding becomes more noticeable on smaller market cap coins as opposed to Bitcoin and Ethereum. The herding effect is a common phenomenon in crypto currency markets that can sometimes result in high price volatility, market bubbles, and reduced informational efficiency. Investor, exchange and regulator risk management regimes should consider herding effects.
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Corresponding Author
Dr. Farah Naz
Assistant Professor, Department of Business Administration, National College of Business Administration & Economics (AlHamra University), Sub-Campus Multan, Punjab, Pakistan.
Corresponding Author: [email protected]
