Empirical analysis reveals pronounced herding behavior during falling markets and varying liquidity conditions, highlighting vital implications for portfolio risk management.
In view of explosive trends and excessive trades in the cryptocurrency markets, this paper contributes to the existing literature by bringing in the limelight the effect of liquidity on the herding behavior in the cryptocurrency market. Results from a first applied herding model including contemporaneous and lagged squared market returns demonstrated that market-wide herding exists within falling markets. The incorporation of liquidity highlights further evidences on herding behavior across cryptocurrencies during high and low liquid days, which varies across percentiles. Our findings bring handy implications for topics of portfolio and risk management, as well as regulation.
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Arsi et al. (2021) studied this question.
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