Herding behavior and contagion in the cryptocurrency market during the Covid-19

Ing. Hamdi Abidi

Master's thesis

Abstract:

This study aims to investigate herding bias and contagion phenomenon in the cryptocurrency market amidst the COVID-19 pandemic. The analysis uses daily closing prices of ten digital currencies during the years 2019 through 2021, where five of them are characterized by their large market capitalization while the remaining are small-cap cryptocurrencies. Furthermore, the closing prices of Dow Jones and its constituents were extracted over the same period. The study adopts Chang et Chang et al. (2000) model to detect crowd bias, while Chiang and Zheng (2010) regression was employed to investigate the existence of the contagion effect. The results proved that investors mimicked each other strategy only in the COVID-19 period for both the small-caps and the large-caps. Furthermore, there is a risk spillover and a cross-herding between the Dominant digital assets and the smaller ones, implying a herding contagion between the market segments. Not only that but there is a relative ripple effect from the American market to the largest cryptocurrencies under study, indicating a somewhat interconnectedness between the two financial markets in the time of crisis.

Abstract:

This study aims to investigate herding bias and contagion phenomenon in the cryptocurrency market amidst the COVID-19 pandemic. The analysis uses daily closing prices of ten digital currencies during the years 2019 through 2021, where five of them are characterized by their large market capitalization while the remaining are small-cap cryptocurrencies. Furthermore, the closing prices of Dow Jones and its constituents were extracted over the same period. The study adopts Chang et Chang et al. (2000) model to detect crowd bias, while Chiang and Zheng (2010) regression was employed to investigate the existence of the contagion effect. The results proved that investors mimicked each other strategy only in the COVID-19 period for both the small-caps and the large-caps. Furthermore, there is a risk spillover and a cross-herding between the Dominant digital assets and the smaller ones, implying a herding contagion between the market segments. Not only that but there is a relative ripple effect from the American market to the largest cryptocurrencies under study, indicating a somewhat interconnectedness between the two financial markets in the time of crisis.

Keywords

Herding Behavior, Contagion, Herding Contagion, Behavioral Finance, Cryptocurrency Market, COVID-19

Language used: English

Date on which the thesis was submitted / produced: 3. 1. 2025

Thesis defence

• Date of defence: 29. 1. 2025
• Supervisor: Ph.D. Axel Alejandro Araneda Barahona
• Reader: doc. Ing. Tomáš Výrost, PhD.

Masaryk University

Faculty of Economics and Administration

Master programme / field:
Finance / Finance