Investigating Herd Behaviour In Cryptocurrency Markets

The worldwide scarcity of liquidity, fuelled by the COVID-19 pandemic, coupled with the exponential growth of the digital currencies in recent years, has sparked traders to shift investments from traditional assets into alternatives arguably the most popular of which are cryptocurrencies. These decentralised assets are not subject to any regulatory measures by governments, opening a breeding ground for volatile trading with opportunities to make extensive returns rapidly. Thus, many investors tend to buy because she made $1000 or sell because she lost money , and progress into the market, without fully understanding it s risks. This is herding. Formally, herding is defined as an occurrence that takes place when investors neglect their own instincts and base their trades on other market participant s actions, without reference to fundamentals. This may be attributed to a sense of herd security, or to the assumption that not everybody can be wrong about a trade. Studying herd behaviour in financial markets is becoming of increasing importance as it can explain the formation of bubbles and the cause of crashes in markets (Avery and Zemsky, 1998), which are typical characteristics of cryptocurrency markets (Corbet et al., 2018). The rest of this paper explains key theories that motivate the cause of herd behaviour, further analysing if this is present in the cryptocurrency market, and whether it is influenced by significant UK COVID-19 rule and lockdown announcements. My dataset for statistical analysis comprises of daily prices of the top 10 cryptocurrencies (by market cap) from 1st of January 2018 to 31st December 2021. I implement Christie and Huang (CH) (1995) and Chang, Cheng, and Khorana (CCK) (2000) s empirical measures of herding to investigate this. My findings do not show evidence of herding during, non-covid related days of extreme returns, however do produce slight significant evidence of herding due to UK COVID lockdown and rule announcement days in the cryptocurrency market.