Extreme sentiment and herding: Evidence from the cryptocurrency market

Investor sentiment can be the potentially crucial factor inducing herding behavior. We advocate novel proxies for investor sentiment in cryptocurrency market and define the extreme positive (negative) sentiment as euphoria (dysphoria). We find significant herding during euphoria and dysphoria. Additionally, herding magnitude appears significantly stronger during dysphoria in most of our sample periods. Counterintuitively, the impact of extreme sentiment on herding is more pronounced in large cryptocurrencies. These findings are robust to a battery of additional tests, including alternative measurements of the market return, alternative definitions of the extreme sentiment, subperiod analysis as well as the alternative proxies for investor sentiment. Taken together, our findings indicate that extreme sentiment is an important determinant of herding in cryptocurrencies.