Journal of Behavioral and Experimental Finance 22 (2019) 41–50

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Journal of Behavioral and Experimental Finance

journal homepage: www.elsevier.com/locate/jbef

Full length article

Herding behavior and contagion in the cryptocurrency market

∗
Paulo Vitor Jordão da Gama Silva, Marcelo Cabus Klotzle ,
Antonio Carlos Figueiredo Pinto, Leonardo Lima Gomes
Pontifical Catholic University of Rio de Janeiro, Rua Marquês de São Vicente, 225, Gávea-Rio de Janeiro, RJ, 22451-900, Brazil

highlights

• We analyze herding behavior and contagion in cryptocurrencies.

• We detected herding behavior using the modified CSAD model.
• We detected adverse beta herding in periods of higher risk aversion.
• We detected bitcoin contagion in almost all currencies.

article info a b s t r a c t

Article history: This study aimed to analyze herding behavior and contagion phenomena in the cryptocurrency market.
Received 7 October 2018 We selected 50 of the most liquid and capitalized currencies in the period from March 2015 to November
Received in revised form 2 January 2019 2018 (daily data). The methodology used for detecting herding behavior comprised adaptations of the
Accepted 22 January 2019
cross-sectional absolute deviation (CSAD) and cross-sectional standard deviation (CSSD) tests, as well
Available online 28 January 2019
as Hwang and Salmon’s (2004) model. For the contagion effect, we utilized adaptations of Forbes and
JEL classification: Rigobon’s (2002) (FR) test, and FR test extensions based on the comoments of Fry, Martin, and Tang (2010)
G10 and Fry-McKibbin and Hsiao (2018). The results of using the CSSD test and Hwang and Salmon’s (2004)
G15 state space model revealed herding behavior, demonstrating extreme periods of adverse herd behavior.
G40 As regards the contagion effect, the modified FR test and its extensions with comoments were able to
identify the Bitcoin contagion in other currencies in almost all cases.
Keywords: © 2019 Elsevier B.V. All rights reserved.
Herding behavior
Contagion
Cryptocurrencies
Behavioral finance

1. Introduction
With the cryptorevolution launched by Nakamoto (2008), a
new and disruptive technology was introduced in the market in
addition to bitcoin in 2009. Nevertheless, the technology was not
the only great surprise, since the market faced a new class of assets
in the market, called cryptocurrencies. As observed by Extance
(2015), the idea of decentralized currencies (without banks, nor
government regulations), has come to the attention of investors,
governments, companies, and academics.
Experiencing exponential growth until December 2017, Bitcoin
stimulated the creation of other coins with different functionalities
(smart contracts, payment methods, cloud services, data storage,
lending, insurance, and many others), and currently more than
1000 different cryptocurrencies are registered, according to the
Coinmarketcap Website (2018).
∗ Corresponding author.
E-mail addresses: pjord@phd.iag.puc-rio.br (P.V.J. da Gama Silva),
klotzle@iag.puc-rio.br (M.C. Klotzle), figueiredo@iag.puc-rio.br (A.C.F. Pinto),
leonardolima@iag.puc-rio.br (L.L. Gomes).
As indicated by Corbet et al. (2018), considering the inflationary
issues in the prices of these digital assets and episodes of ex-
treme volatility, these assets suffer great destabilization through
some undesirable characteristics, which have been associated with
and are known as the cryptocurrency trilemma: the potential for
inherent bubbles, regulatory issues, and cybercriminality. In this
context, behavior anomalies were identified in the digital market,
such as a herd effect (Bouri et al., 2018; Vidal-Tomás et al., 2018)
and even a contagion effect (Huynh et al., 2018).
Herding behavior among investors is a popular behavioral ex-
planation for the excess of volatility and the short term trends
observed in finance markets, being the topic of several empirical
studies (Lakonishok et al., 1992; Christie and Huang, 1995; Chang
et al., 2000; Hwang and Salmon, 2004; Demirer et al., 2010; Yao
et al., 2014; Galariotis et al., 2015; Economou et al., 2016; Bensaïda,
2017; Kabir and Shakur, 2018).
In contrast, contagion, defined by the World Bank as a shock
process transmitted among countries, considering market
comovements that increase the correlation between different
economies, has been studied since the 1990s. During this period,

https://doi.org/10.1016/j.jbef.2019.01.006
2214-6350/© 2019 Elsevier B.V. All rights reserved.
42 P.V.J. da Gama Silva, M.C. Klotzle, A.C.F. Pinto et al. / Journal of Behavioral and Experimental Finance 22 (2019) 41–50
the world experienced a great crisis and the consequent systemic
impact on several economies. This motivated studies such as Engle
et al. (1990), Bekaert and Hodrick (1992), Dungey and Zhum-
abekova (2001), Basu (2002), Pericoli and Sbracia (2003), Beirne
et al. (2009), Longstaff (2010), Bekaert et al. (2014), Sahalia and
Cacho-Diaz (2015), Silva et al. (2016), Nguyen et al. (2017), and
Casarin et al. (2018).
This study aims at identifying and analyzing the herding and
contagion behavior in the cryptocurrencies market, considering
the CRyptocurrency IndeX (CRIX) and a set of 50 digital currencies
of higher market value and liquidity, which have the same amount
of historical data as this index (1000 daily observations) from
March 2015 to November 2018. Although there are more than 1000
digital currencies, most of them are recent, appeared in early 2018,
and, because of this, have short historical time series.
The methodologies applied to evaluate the herding behavior
comprise modifications of classical herding behavior determina-
tion approaches, developed by Christie and Huang (1995) using
the cross-sectional standard deviation (CSSD) of returns, and the
approach of Chang et al. (2000), from the stock returns distribution
with cross-sectional absolute deviation (CSAD). In addition, we
applied the generalization of classical models based on the Kalman
filter, following the study of Hwang and Salmon (2004). To evaluate
the contagion effect, we chose Forbes and Rigobon’s (2002) para-
metric contagion tests and their extensions, considering moments
of higher order, elaborated by Fry et al. (2010) and Fry-McKibbin
and Hsiao (2018).
Studying herding behavior is important for understanding the
price distortions of cryptocurrencies, which can, for example, gen-
erate ‘‘bubbles’’ (as seen in Corbet et al., 2018) and for analyzing
the dynamics and relations among digital currencies for the for-
mation of cryptocurrencies portfolios. Three issues appearing in
the literature highlight the importance of this study: the contagion
effect’s involvement in portfolio management and risk diversifi-
cation processes, and in subsidies from monetary policy makers
(since the effects of cryptocurrencies are expanding to the most
diverse economic fronts).
2. Theoretical framework
2.1. Herding behavior
The methods for determining herding behavior can be divided
into two large categories. The first one focuses on a micro-
approach, investigating when specific types of investors exhibit
herding behavior (the main proponents of this approach are Lakon-
ishok et al. (1992) and Sias (2004)). The second category, the
basis of this study, concentrates on a macro-approach. The latter
involves market activities and prices of financial products available
for purchase by any investor (the main exponents of this approach
are Christie and Huang, 1995; Chang et al., 2000; Hwang and
Salmon, 2004).
In the approach suggested by Christie and Huang (1995), re-
ferred to here as CH method, investors’ herding behavior is mea-
sured with respect to market consensus. This analysis proposes
that, during periods of extreme market movements, investors are
more likely to suppress their own beliefs and follow the market
consensus.
The measure proposed by Christie and Huang (1995) assumes
that herding behavior is the cross-sectional dispersion of assets
returns relative to the average market return. If the assets move
simultaneously with the latter, then there is no dispersion, that is,
herding behavior occurs. The proposed measure is known as CSSD,
given by Eq. (1).
 During the 1990s, as highlighted by Bekiros (2014), contagion
 N
∑ ( )2
CSSDt = √ Ri,t − Rm,t /N − 1
i=1
where Ri,t is the return of asset i in period t, Rm,t is the cross-
sectional average return of the market portfolio in period t, and N
is the number of assets.
Therefore, the CH metric captures the proximity of the return of
a particular asset to the realized return of the market portfolio and
then uses the regression specified in Eq. (2) to study the dispersion
of returns during the periods of extreme market movements.
CSSDt = α + γ1 DLt + γ2 DUt + εt (2)
where: DLt= 1 if the market returns are at the lower end of the
distribution and DLt = 0 otherwise, and DUt = 1 if the market
returns are at the upper end of the distribution and DUt = 0
otherwise.
The utilization of dummy variables allows the identification of
differences in investor behavior under extreme market conditions
(positive and negative) and under normal market conditions. Thus,
if the dispersion is low in the presence of large market changes,
that is, when the estimated gammas are negative and statistically
significant, the occurrence of herding behavior is assumed.
Chang et al. (2000) developed the method we denote by CCK,
an alternative approach to the CH method, to evaluate the herding
behavior by also considering the issue of market consensus. They
noticed that the CH approach is a more rigorous test, requiring
a greater magnitude of non-linearity to find evidence of herding
behavior. Therefore, the herding behavior test of the CCK method
facilitates the detection of the effect over the entire distribution
of market returns by using the cross-sectional absolute deviation
(CSAD) of returns (given by Eq. (3)).
N
1 ∑⏐
⏐
CSADt = ⏐Ri,t − Rm,t ⏐ (3)
N
i=1
where: Ri,t is the return of asset i in period t, Rm,t is the cross-
sectional average return of the market portfolio in time t, and N
is the number of assets. Then, the test uses the regression specified
in Eq. (4) to study the returns’ dispersion during the periods of
extreme market movements.
CSADi,t = α + γ1 ⏐Rm,t ⏐ + γ2 R2m,t + εt
⏐ ⏐
(4)
Chang et al. (2000) developed CSAD based on the CAPM (Capital
Asset Pricing Model) model, assuming that the returns’ dispersion
is linearly related to the market returns. Therefore, in the absence
of herding behavior we can expect a positive and significant es-
timate for the γ1 coefficient. On the other hand, if we observe
herding behavior in days of extreme market movements, it is
expected that the cross-sectional dispersion of stock returns will
decrease or increase to a lesser extent than the market return. In
this situation, when the estimated γ2 coefficient is negative and
statistically significant, we assume herding behavior has occurred.
Hwang and Salmon (2004) developed an alternative measure-
ment of herding behavior based on the cross-sectional dispersion
of assets’ sensitivity to market factors. Since their model focuses on
the herding behavior originated from cross-sectional variation of
betas instead of returns, it is free from the influence of idiosyncratic
components. In addition, since the methodology is based on state-
space models, it allows for the control of changes in firm funda-
mentals and for the existence of herding behavior not only during
periods of extreme movements, but also during normal market
conditions.
2.2. Contagion effect
effect started being used in the financial literature to identify the
(1) consequences of a market crisis whose effect was widespread and
perceived in other economies.
 P.V.J. da Gama Silva, M.C. Klotzle, A.C.F. Pinto et al. / Journal of Behavioral and Experimental Finance 22 (2019) 41–50 43

Table 1 Nem, Monero, Bytecoin, Verge, Siacoin, BitShares, Decred, and

The 50 cryptocurrencies selected. Dogecoin) during the period from April 2013 to May 2018. The
1 2 3 4 5 6 authors analyzed the herd effect through the CSAD approach (using
BTC ETH XRP XLM LTC XMR market return as a weighted average based on the percentage
Bitcoin Ethereum Ripple Stellar LumensLitecoin Monero
of total market capitalization of the 14 cryptocurrencies) and a
7 8 9 10 11 12 robustness test to detect structural breaks in the sample (five
Tether DASH DOGE BTS BCN DGB breaks were detected). The BDS test was applied to the residuals
Tether DollarDash Dogecoin BitShares Bytecoin DigiByte of the static model (the nonlinearity test of Brock et al., 1996).
13 14 15 16 17 18 Results from the static model suggested no herding. However,
XVG MAID MONA RDD Nxt SYS the presence of structural breaks and nonlinearities in the data
Verge MaidSafeCoinMonacoin ReddCoin Nxt Syscoin series suggested that applying a static model is not appropriate.
19 20 21 22 23 24 The authors conducted a rolling-window analysis, and its results
PPC NXS GRS VTC EMC2 UBQ detected significant herding behavior, which varies over time.
Peercoin Nexus Groestlcoin VertCoin Einsteinium Ubiq Using a logistic regression, the authors also found that herding
25 26 27 28 29 30 tended to occur as uncertainty increased.
BLOCK NAV BITCNY NVC XDN VIA Huynh et al. (2018) analyzed the contagion among three coins
Blocknet NavCoin bitCNY Novacoin DigitalNote ViaCoin (Bitcoin, Litecoin, and Ripple) during the period from 2013 to 2017.
31 32 33 34 35 36 The authors evaluated the relations using the Copulas approach to
BAY BURST XWC CLOAK BBR UNO understand the movement of the cryptocurrencies’ return based
BitBay Burst WhiteCoin CloakCoin Boolberry Unobtanium on price. The authors’ question was whether contagion risk among
37 38 39 40 41 42 these cryptocurrencies occurs or not in the event of crashing.
NLG BITUSD GAME CSC XCP NMC The results show that, based on Kendall-plots, all cryptocurrency
Gulden BitUSD GameCreditsCassinoCoin CounterpartyNamecoin pairs have a structure dependence, and, based on Chi-plots, a
43 44 45 46 47 48 particularly strong left-tail dependence (i.e., the study indicated
FTC XPM CRW FLO BLK ECC the existence of contagion risk among the cryptocurrencies ana-
Feathercoin PrimeCoin Crown FlorinCoin BlackCoin ECC lyzed). The authors also concluded that the three methodologies,
49 50 namely Kendall-plots, Chi-plots, and Copulas estimation produce
DMD POT consistent results.
Diamond PotCoin
3. Methodology and data

Forbes and Rigobon (2002) (whose method we denote by FR)
state that there is a difference between contagion effect and in-
terdependence, with the latter arising from preexisting economic
relations between countries. Based on this statement, the authors
suggest a conditional correlation coefficient for the calculation of
the contagion effect. This coefficient considers the increase in stock
market variance, in the countries where a crisis originates, during
a turbulence period. In applying this procedure in their study, the
authors found interdependence but not herding in the 1997 Asian
crisis, the 1994 Mexican crisis, and the 1988 crash of the American
stock market.
As seen in Kynigakis (2015), other recent methodologies using
higher-order moments have been considered in studies of conta-
gion, as an expansion of the FR test. Those include coasymmetry
(Fry et al., 2010), cokurtosis (Fry-McKibbin and Hsiao, 2018), and
covolatility (Fry-McKibbin and Hsiao, 2018) measures.
Section 3 will discuss these models in more detail.
2.3. Relevant previous studies
Vidal-Tomás et al. (2018) analyzed herding behavior in the
cryptocurrency market using CSSD and CSAD (with the approach
of Chang et al., 2000; Chiang and Zheng, 2010) during the period
from January 2015 to December 2017 for 65 cryptocurrencies.
The authors employed an equally-weighted market portfolio to
calculate market returns in the two models. Observing the results,
the authors found a herd effect with the CSSD model but not with
the CSAD model. It is possible to see that extreme dispersion of
returns is explained by rational asset pricing models despite herd-
ing during bear markets, which highlights the inefficiency and risk
of cryptocurrencies. The authors also concluded that the smallest
digital currencies are herding with the largest ones and that the
herding phenomenon cannot be solely attributed to Bitcoin.
Bouri et al. (2018) studied the herd effect in 14 leading cryp-
tocurrencies (Bitcoin, Ethereum, Ripple, Litecoin, Stellar, Dash,
We obtained daily data from the website crix.hu-berlin.de for
CRIX and through the database of the coinmarketcap website for
the currencies. The period considered in the analysis was March
2015 to November 2018 (with 1344 daily data points). The list of
currencies is presented in Table 1. The currencies were chosen
based on liquidity and market capitalization criteria and, also on
data availability (on November 13th, 2018).
To simplify the description of the methodology, we divide it into
three stages. First, we present the calculation of CRIX. Second, the
methodology for the detection of the herd effect is provided, based
on the classic models of Christie and Huang (1995) and Chang
et al. (2000) and the state-space model of Hwang and Salmon
(2004). Finally, the methodology for the detection of contagion is
presented, based on Forbes and Rigobon (2002) and its extensions
considering comoments elaborated by Fry et al. (2010) and Fry-
McKibbin and Hsiao (2018).
3.1. CRIX
As observed by Elendner et al. (2016), the 75-currency portfolio
on which CRIX is based presents a lower risk than any individual
cryptocurrency and has a monthly rebalancing (given the contin-
uous market capitalization changes, a simple weighted-portfolio
could bias the analysis). This index was chosen because it offers the
largest database available daily, and it was elaborated according to
robust econometric metrics.
According to Trimborn and Härdle (2016), the basic idea of any
price index is the weight of the prices of its constituent goods com-
pared to the quantities of goods bought or consumed. Therefore,
based on the Laspeyres formula, the authors of CRIX developed the
adaptation
∑k
i=1 βi,tn− Pi,t Qi,tn−
CRIXt (k, β) = (5)
Div isor (k)t −
n
44 P.V.J. da Gama Silva, M.C. Klotzle, A.C.F. Pinto et al. / Journal of Behavioral and Experimental Finance 22 (2019) 41–50
where the variable Pi,t is the price of asset i in period t; Qi,t is the
quantity of asset i at time t; and, βi,t − is the adjustment factor for
n
asset i at time point tn− , where n indicates the nth adjustment factor
and tn the last point where Qi,t − , Div isor (k)t − , and βi,t − have been
−
n n
updated. Div isor(k) ensures that CRIX has a default value on the
start date (defined in Eq. (6)).
∑k
βi0 Pi0 Qi0
Div isor(k,β)0 = i=1
(6)
InitialValue
where the initial value can be defined as 100, 1000 or 10,000,
ensuring that a positive or negative change from the base period
is revealed. Whenever changes in the structure of CRIX occur,
Div isor(k) is adjusted so that only the price changes are reflected in
the index. The method of choosing the currencies depends on the
AIC criterion and is proposed to react rapidly to market changes.
Thus, it allows creating an econometrically robust index by ap-
plying cross-validation, total cross-validation, generalized cross-
validation, and generalized total cross validation. Some interesting
studies with CRIX include Elendner et al. (2016), Chen et al. (2016),
Trimborn et al. (2017), and Chen et al. (2018).
3.2. Measuring the herd effect
First, when replacing the market return with the CRIX return,
we use the measure proposed by Christie and Huang (1995),
known as CSSD (Eq. (2)), as modified in Eq. (7).
√ )2
∑N (
CSSDt = i=1 Ri,t − RCRIX Index /N − 1
CSSDt = α + γ1 DLt + γ2 DUt + εt
The second way to evaluate herding behavior, the CCK method,
is an alternative approach to the CH method. Thus, we applied
CSAD (already defined in Eq. (4)), modified for the digital currency
market, replacing the market return by the CRIX return in Eqs. (8)
and (9):
N FR (i → j) =
1 ∑⏐
⏐
CSADt = ⏐Ri,t − RCRIX Index ⏐
N
i=1
CSADi,t = α + γ1 ⏐RCRIX INDEX ,t ⏐ + γ2 R2CRIX INDEX ,t + εt
⏐ ⏐
In the third approach, based on Hwang and Salmon (2004),
we will estimate the state-space model with the Kalman filter.
Following the CSAD approach, Hwang and Salmon (2004) also con-
sider, as an adequate measurement of herding, the one included in
the risk-return relation, focusing on the cross-sectional variance
of the sensitivity factor, based on a state-space model. Unlike the
CSSD approach, the state-space model can detect herding behavior
during quiet/normal market periods and may allow a dynamic
analysis over time.
To apply the Hwang and Salmon model (2004), we first cal-
culated the daily standard deviations of the daily beta sets for all
currencies (obtained by simple regression between each currency
and CRIX, on a weekly rolling-window basis). The next step was to
obtain the logs of the results, and then, we applied Eqs. (10) and
(11), the state-space model.
log Std βimt
b
= µm + Hmt + υmt
[ ( )]
Hmt = ∅m Hmt −1 + ηmt
where µm = E (log [Std (βimt )]), assumed to be constant in the
short run; E (.) and Std (.) represent the cross-sectional expected
value and standard deviation, respectively; βit (is the systematic
risk measure; Hmt = log(1 − hmt ); and, ηmt ∼ iid 0, σm2 η . Eqs. (10)
)
and (11) represent the basic state-space model with Kalman filter
estimators. In this study, the focus will be on the dynamic structure
of the movements in the latent variable Hmt . When σm2 η = 0, there
is no herding behavior, which implies that Hmt = 0 for all values
of t. This model enables the herding behavior, captured by the Hmt
variable, to vary with time and follow a dynamic process. A statisti-
cally significant value for σm2 η can be understood as representative
n
of the herding behavior, and a significant ∅m value evidences an
autoregressive model of a particular herding behavior.
3.3. Measuring the contagion effect
The first method for determining the contagion effect among
the digital currencies will be a modification of the FR test for
parametric contagion by Forbes and Rigobon (2002). Before their
work, most studies did not differentiate between the comove-
ments and the contagion, because they focused mainly on the
channels through which negative shocks propagate; after their
work, researches started to emphasize the differences between the
behavior caused by normal interdependence and the contagion
promoted by structural change. For the FR test, Pearson’s coeffi-
cient is defined in Eq. (10).
δ
vy|xi = √ ( ) (12)
σy2,i −σx2,i
1−δ
( )
1+ 2
σx2,i
where σx and σy represent the variances of the currencies x and y,
respectively; x represents Bitcoin and y one of the other currencies;
and, δ is the correlation coefficient between two currencies.
(7)
Eq. (13) defines the test statistic of the FR test for detecting
the occurrence of the contagion effect of currency i on currency
j, including the modification in the original formula, that is, the
authors’ use of the Fisher transformation, for improving the finite
sample properties of the test statistic.
( 1+v̂ )
1 y|xi
+ 12 ln
( 1+δ )
2
ln 1−v̂y|x 1−δ
i
(13)
√
1 1
(8) T −3
+ T −3
where δ is the correlation coefficient of the two currencies and T
(9) is the number of observations from the digital currency market (in
this study, T = 1,000). The value obtained for the FR test statistic
must be compared to the critical value of the t distribution, where
H0 : v̂y|xi ≤ p̂x (when there is no contagion) and H1 : v̂y|xi > p̂x (when
contagion has occurred).
The second, third, and fourth methods for evaluating the con-
tagion effect use an extension of the FR test based on the como-
ments defined by Fry et al. (2010) and Fry-McKibbin and Hsiao
(2018). Moments of higher order in univariate distributions of asset
returns during financial crisis, such as asymmetry and kurtosis,
give additional information on investors’ preferences regarding
the risk-return tradeoff. The importance of identifying the role
of higher-order moments also applies to the importance of iden-
tifying the movements between these moments in multivariate
distributions.
Eq. (14) defines the coasymmetry test by Fry et al. (2010),
modified to compare the currencies differently from the original
(10)
formula that evaluates contagion between different markets pre-
(11) and post-crisis periods. The same modifications apply to the tests
of cokurtosis and covolatility in Eqs. (15) and (16), respectively;
both are based on Fry-McKibbin and Hsiao (2018). See Eqs. (14)–
(16) given in Box I.
For the coasymmetry (CS), cokurtosis (CK), and covolatility (CV)
equations, the value obtained in the test must be compared with
the two-tailed critical values of the t distribution, where the null
hypothesis is that no contagion effect exists.
 P.V.J. da Gama Silva, M.C. Klotzle, A.C.F. Pinto et al. / Journal of Behavioral and Experimental Finance 22 (2019) 41–50 45

∑Tx ( x−µ̂x ) ( x−µ̂x )2 ⎥2

⎢( ) ( )⎥
⎢ 1 ∑Ty ( y−µ̂y ) ( y−µ̂y )1 1
⎢ T t =1 σ̂
y σ̂y
− T t =1 σ̂x σ̂x
⎥
⎢ ⎥
CS = ⎢
⎣ √ ( 4v +2 ) ( )
⎥
⎦ (14)
2 y|xi 4δ +2
T T

⎥2
⎢( ) ( )⎥
⎢ 1 ∑Ty ( y−µ̂y ) ( y−µ̂y )1 )3
⎢ ( )(
T x−µ̂x x−µ̂x
− 3vy|xi − T t =1 σ̂x
1
− 3δ ⎥
∑ x
⎥
⎢ T t =1 σ̂ σ̂y σ̂x
⎢ y ⎥
CK = ⎢
⎢ √( )
⎥
⎥ (15)
18vy2|x +6
( )
18δ 2 +6
⎣ i
⎦
T T

⎥2
⎢( ) ( )⎥
⎢ 1 ∑Ty ( y−µ̂y ) ( y−µ̂y )2 )2
⎢ ( )(
Tx x−µ̂x x−µ̂x
− (1 + 2vy|xi ) − T t =1 σ̂x
2 1
− (1 + 2δ ) ⎥
2
∑ ⎥
⎢ T t =1 σ̂ σ̂y σ̂x
⎢ y ⎥
CV = ⎢
⎢ √( )
⎥
⎥ (16)
4vy4|x +16vy2|x +4
( )
4 δ 4 +16δ 2 +4
⎣ i i
⎦
T T

Box I.

Table 2 Table 3
CSSD: Estimated coefficients. CSAD: Estimated coefficients.
CSSDt = α + γ1 DLt + γ2 DUt + εt CSADi,t = α + γ1 ⏐RCRIX ⏐ + γ2 R2 + εt
⏐ ⏐
INDEX ,t CRIX INDEX ,t

Criteria for 1% extremes Period Variables Coefficients Std. error Probability

Variables 2015–2018 2015 2016 2017 2018 α 0.0581*** 0.0009 0.0000
α 0.1077*** 0.1165*** 0.1202*** 0.1128*** 0.0785*** 2015–2018 γ1 0.3307*** 0.0414 0.0000
γ1 −0.0717*** −0.0618** −0.0775*** −0.0663*** −0.0451*** γ2 −0.4713 0.2980 0.1137
γ2 0.2288*** 0.1927*** 0.2145*** 0.2231*** 0.2731*** α 0.0636*** 0.0017 0.0000
Criteria for 2% extremes 2015 γ1 −0.072 0.1231 0.5593
γ2 4.0942*** 1.3111 0.0018
Variables 2015–2018 2015 2016 2017 2018
α 0.0612*** 0.0014 0.0000
α 0.1080*** 0.1167*** 0.1203*** 0.1126*** 0.0788*** 2016 γ1 0.2386* 0.1046 0.0225
γ1 −0.0692*** −0.0591*** −0.0732*** −0.0631*** −0.0440*** γ2 1.0832 0.9311 0.2447
γ2 0.1962*** 0.1692*** 0.1956*** 0.1829*** 0.1546***
α 0.0649*** 0.0020 0.0000
Criteria for 5% extremes 2017 γ1 0.2444*** 0.0755 0.0012
Variables 2015–2018 2015 2016 2017 2018 γ2 −0.7077 0.4928 0.1510
α 0.1077*** 0.1167*** 0.1199*** 0.1123*** 0.0786*** α 0.0392*** 0.0020 0.0000
γ1 −0.0628*** −0.0562*** −0.0650*** −0.0564*** −0.0410*** 2018 γ1 0.6677*** 0.0754 0.0000
γ2 0.1467*** 0.1319*** 0.1553*** 0.1397*** 0.1029*** γ2 −1.3282*** 0.4847 0.0061
Criteria for 10% extremes *
p < 0.10,** : p < 0.05, and*** : p < 0.01.
Variables 2015–2018 2015 2016 2017 2018
α 0.1069*** 0.1157*** 0.1187*** 0.1123*** 0.0779*** Table 4
γ1 −0.0557*** −0.0512*** −0.0573*** −0.0501*** −0.0364*** HS model results.
γ2 0.1146*** 0.1072*** 0.1213*** 0.1130*** 0.0776*** log Std βimt = µm + Hmt + υmt Hmt = ∅m Hmt −1 + ηmt
[ b
( )]

*
: p < 0.10,** : p < 0.05, and*** : p < 0.01. Coefficients
2015–2018 2015 2016 2017 2018
µm −0.5740*** −0.5715*** −0.6313*** −0.5626*** −0.5052***
4. Results υmt 0.0038*** 0.0051*** 0.00006*** 0.0041*** 0.0062***
∅m 0.8525*** 0.9186*** 0.8281*** 0.8760*** 0.7026***
4.1. Herding behavior ηmt 0.0102*** 0.0025*** 0.0187*** 0.0104*** 0.0074***
*
: p < 0.10,** : p < 0.05, and*** : p < 0.01.
Tables 2 and 3 display the estimated coefficients of the CSSD
and CSAD model, respectively. It is possible to notice herding
behavior in the CSSD model results during the down-market period
(for all data series), since γ1 is negative and significant. On the other Graph 1 shows the trends in the statistical measure (hmt =
hand, in Table 3, we can see that γ2 is negative and nonsignificant 1 − exp(Hmt )) of herding behavior over the period from 2015 to
(indicating a weak herd effect) for all periods except for 2018, 2018. It is interesting to notice that, although herding behavior is
where it is negative and significant (indicating a clear herd effect). present in the observed currencies, only extreme values of adverse
In HS model results in Table 4, all coefficients associated with herding appear more repetitively.
herding behavior (∅m ) are significant (for all data series). It is In general, as seen in Elkhaldi and Abelfatteh (2014), herding
possible to see that in the full period (2015–2018), Hmt is highly behavior and adverse herding behavior are two phenomena acting
persistent, with the ∅m term equal to 0.8525 and the coefficient in synergy. Adverse herding behavior is a synonym of reversion to
of ηmt , representing the logarithm of the variance error term, also the mean in the βimt value to long-term equilibrium values. When
highly significant. the occurrence of herding behavior is confirmed, adverse herding
46 P.V.J. da Gama Silva, M.C. Klotzle, A.C.F. Pinto et al. / Journal of Behavioral and Experimental Finance 22 (2019) 41–50

Graph 1. Statistical trend of herding behavior in Digital Currency market 2015–2018.

behavior may occur gradually to promote a systematic adjustment. Table 5

The results of this study show that this is more common in the HS test for the periods before and after the data break.

crypto asset market. Part 1. Before the break date

In 2015, practically only in the beginning of the year can we Coefficient Std. error z-statistic Prob.
notice a positive herd behavior, which could be influenced by the µm −0.5950*** 0.0262 −22.7256 0.0000
hacking attack at the cryptocurrency exchange company Bitstamp υmt 0.0024*** 0.1711 −35.2345 0.0000
(the company lost a total of $5.1 million). ∅m 0.8612*** 0.0180 47.9382 0.0000
ηmt 0.0114*** 0.0646 −69.1592 0.0000
From May to November 2015, the predominance was adverse
herding behavior and better news emerge during this time, such Part 2. After the break date
as the following: records established in fundraising for Initial Coin Coefficient Std. error z-statistic Prob.
Offers (ICOs) (in Coinbase and Stealth 21 Inc.); NASDAQ released its µm −0.5288*** 0.0205 −25.7808 0.0000
research on blockchain solutions; Bitcoin was declared a commod- υmt 0.0064*** 0.1943 −25.9661 0.0000
ity by the US regulator; the European Court of Justice ruled that the ∅m 0.7664*** 0.0472 16.2263 0.0000
exchange of Bitcoin and ‘‘virtual currencies’’ is not subject to value- ηmt 0.0084*** 0.2259 −21.1081 0.0000

added tax in the European Union; Bitcoin appeared prominently *

on the front page of ‘‘The Economist’’; and the Unicode committee
accepted the Bitcoin monetary symbol.
By mid-December 2015 until March 2016, it is possible to note
a positive herd effect movement. Some highlights from this period
are: Bitcoin fork for Bitcoin Unlimited (on January 15th, 2016);
Bitcoin fork for Bitcoin Classic (on February 10th, 2017); Japan’s ag-
gressive efforts for the adoption of virtual currencies in finance and
payments; the arrival of a new cryptocurrency exchange company
called BitSquare; European parliament votes in favor of Bitcoin;
the announcement that the Swiss city of Zug and some European
countries would begin accepting Bitcoin for government service
payments.
From the end of June 2016 to September 2016, some predomi-
nant cases of herd effect can be noticed and some interesting news
was pointed: the mining reward fell from 25 Bitcoins (BTC) per
block to 12.5 BTC; Bitcoins from Bitfinex were stolen on August
8th, 2016 causing unease in the market; BitFinex announced a
repayment plan for token holders; and a memory bug scandal
occurred on the Ethereum network.
Between the end of September 2016 and February 2017, we
notice a reversal in the herd effect and relevant some news in
this period: devaluation of the yuan; elections in the United States
(with the so-called ‘‘Trump effect’’); the US Securities and Ex-
change Commission (SEC) rejected Bitcoin’s ETF (Exchange Traded
Funds); and the Bank of China attempted to regulate cryptocurren-
cies and repress all Bitcoin trades.
We can see that from the end of February 2017 to April 2017,
factors such as Brexit (referring to the United Kingdom’s decision
to leave the European Union); the French elections (with President
Macron’s position on digital currencies); and the announcement
of the tax reform by the US President Donald Trump, apparently
boosted the herd effect in the market.
From May 2017 to July 2017, a reversal in the herd effect is ob-
served, and news such as the following emerge: Japan’s declaration
that Bitcoin would be accepted as a legal payment method; and
: p < 0.10,** : p < 0.05, and*** : p < 0.01.
the annual Consensus Conference in New York, where a plan was
delineated for the adoption of SegWit with a fork planned to occur
in six months and modification for a block size of 2 MB.
Between August and September 2017, the herd effect was more
prominent and was accompanied by news such as the SegWit fork
(August 23rd, 2017); China’s regulation of companies that raised
money through ICOs; and the pronouncement of Bitcoin as fraud
by JP Morgan’s CEO (Jamie Dimon). In late October 2017, the CME
Group announced plans to introduce Bitcoin futures trading by the
end of the year, apparently stimulating a reversal of the herd effect.
From November 2017 to December 2017, a reversal in the herd
effect was observed, accompanied by news such as the cancellation
of Segwit2X and a new Bitcoin fork (on November 12th, 2017
for Bitcoin Gold); the Commodities Futures Trading Commission
(CFTC) approval on future Bitcoin trades; and the price of Bitcoin
reaching the all-time high of $20,000.
During 2018, the herd effect was dominated by a scenario of
pessimism surrounding the digital market, since Bitcoin sank after
reaching the maximum $20,000 price. Although, on the one hand,
the liquidity crisis forced people to liquidate their cryptocurrency
investments, which was expected, given the lack of enthusiasm
in the digital market, on the other hand experts and crypto fans
remained positive and hopeful about the future of Bitcoin and the
digital market.
Therefore, it is possible to assume that cryptocurrency investors
are more affected by negative information/influences when herd-
ing behavior exists, than by positive information/influences (when
there is a reversal in herding behavior). That is, it is observed that
an investor is more risk averse in the loss domain and that Bitcoin
drives/directs the investment flows in cryptoassets.
For a complementary analysis and robustness test in the time
series presented in Graph 1, we made a Zivot-Andrews unit root
 P.V.J. da Gama Silva, M.C. Klotzle, A.C.F. Pinto et al. / Journal of Behavioral and Experimental Finance 22 (2019) 41–50 47

Graph 2. Structural date break test and herd effect in the first and second period.

Table 6 Table 7
FR contagion test for 2015–2018. FR contagion test results by year.
Currency ETH XRP XLM LTC XMR Tether DASH DOGE Coins in which there was no contagion
CS test 3.69*** 0.79*** 6.75*** 13.01*** 9.95*** −1.99*** 9.82*** 11.1*** 2015–2018 2015 2016 2017 2018
Test effect CT – CT CT CT – CT CT XRP ETH ETH VIA XRP XRP
Currency BTS BCN DGB XVG MAID MONA RDD Nxt Tether XRP XRP BAY Tether Tether
BITCNY Tether XLM Burst BCN BITCNY
CS test 8.09*** 4.67*** 6.11*** 3.87*** 8.75*** 5.66*** 4.48*** 9.29***
BITUSD XVG XMR XWC DGB BITUSD
Test effect CT CT CT CT CT CT CT CT
CSC MONA Tether CLOAK XVG CSC
Currency SYS PPC NXS GRS VTC EMC2 UBQ BLOCK CRW RDD DASH BBR RDD NMC
CS test 6.71*** 10.19*** 4.39*** 3.81*** 5.33*** 5.78*** 2.71*** 4.23*** ECC NXS BTS NLG GRS
Test effect CT CT CT CT CT CT CT CT VTC BCN BITUSD UBQ
UBQ DGB GAME CLOAK
Currency NAV BITCNY NVC XDN VIA BAY Burst XWC BLOCK XVG CSC BBR
CS test 4.56*** 0.82*** 6.93*** 6.81*** 5.68*** 6.74*** 6.83*** 5.05*** NAV MAID XCP CSC
Test effect CT – CT CT CT CT CT CT BITCNY MONA FTC ECC
BAY RDD XPM
Currency CLOAK BBR UNO NLG BITUSD GAME CSC XCP
XWC Nxt CRW
CS test 3.34*** 3.45*** 7.52*** 6.32*** 1.42** 4.54*** 0.40*** 6.45*** CLOAK SYS FLO
Test effect CT CT CT CT – CT – CT BBR NXS BLK
Currency NMC FTC XPM CRW FLO BLK ECC DMD BITUSD GRS ECC
GAME VTC POT
CS test 6.90*** 5.52*** 8.05*** 1.44** 5.19*** 8.8*** 0.64*** 7.87*** CSC EMC2
Test effect CT CT CT – CT CT – CT FTC UBQ
Currency POT CRW BLOCK
FLO NAV
CS test 6.06***
ECC BITCNY
Test effect CT
DMD XDN
*
: p < 0.10, **: p < 0.05, and*** : p < 0.01.

4.2. Contagion effect

test for structural date break (Zivot and Andrews, 1992) and found
a date break on September 14th, 2017 in the CRIX INDEX (which
represent the market). (Graph 2). We analyzed the time series
in the periods before (Part 1) and after (Part 2) the date break
separately and found a herd effect in both cases (Table 5). Although
the results of the ∅m coefficient show similarity, the data in ‘‘Part
2 after the break date’’ indicate a low value in the herd effect,
which may indicate a reversal in herd effect influenced to the fall
after Dec 2017. In addition, it is important to observe the increased
volatility in the second part of the data, which can also influence
this difference found in the periods.
After performing the parametric contagion test according to
Forbes and Rigobon (2002), with Bitcoin as the basis of interaction
among the other 49 digital currencies, it was possible to notice that
the results obtained in the FR test were against the rejection of the
null hypothesis (no contagion). Table 6 shows the results, where
CT means contagion and ‘‘–’’ indicates no contagion. In addition,
we present the results by year in Table 7.
In some coins, such as XRP, Tether, BITCNY, BITUSD, CSC, CRW,
and ECC, it was not possible to find contagion by Bitcoin. Most of
these coins share the price stability of their associated currencies
48 P.V.J. da Gama Silva, M.C. Klotzle, A.C.F. Pinto et al. / Journal of Behavioral and Experimental Finance 22 (2019) 41–50

Table 8 (that of the US dollar, for example) and have inflation control in
Coasymmetry contagion test (CS) 2015–2018. different forms. Only Tether, BITCNY, and ECC were consistent,
Currency ETH XRP XLM LTC XMR Tether DASH DOGE presenting no contagion with Bitcoin across all years (Table 7).
CS test 688.33 3680.511613.29268.96 412.72 153.96 385.01 352.63 In Table 8, the coasymmetry contagion test was able to capture
Test effect CT CT CT CT CT CT CT CT
the contagion of Bitcoin over the entire period from 2015 to 2018.
Currency BTS BCN DGB XVG MAID MONA RDD Nxt However, it is interesting to observe that in the CS test results by
CS test 358.05 371.85 2560.10223.40 22.29 1861.67748.94 241.20 year (Table 9), Tether appeared in 2015 and BITUSD in 2016.
Test effect CT CT CT CT CT CT CT CT In Tables A.1 and A.2 ( Appendix), the cokurtosis and coasym-
Currency SYS PPC NXS GRS VTC EMC2 UBQ BLOCK metry tests used to evaluate contagion indicated that all the cur-
CS test 279.08 7.13 229.45 1089.17899.72 1422.0338 252.61115.40 rencies, exhibited a contagion effect related to Bitcoin (inclusive
Test effect CT CT CT CT CT CT CT CT over the years).
Currency NAV BITCNY NVC XDN VIA BAY Burst XWC As seen in Fry-McKibbin and Hsiao (2018), the cokurtosis and
CS test 2237.211099.18504.38 1258.01371.67 220.59 371.05 1090.01 covolatility appearing in financial markets tend to exhibit a neg-
Test effect CT CT CT CT CT CT CT CT ative relationship in the period without a crisis, which changes
Currency CLOAK BBR UNO NLG BITUSDGAME CSC XCP to a positive relationship during the crisis period. Even though
CS test 730.12 270.71 6.35 246.57 12.61 840.11 43 015.33543.955 we did not split our sample in a crisis and non-crisis period, it is
Test effect CT CT CT CT CT CT CT CT possible to infer that the contagion was even more generalized due
Currency NMC FTC XPM CRW FLO BLK ECC DMD to the greater number of comovements., as seen in the high positive
CS test 189.66 44.97 628.95 134.13 359.16 702.94 93.13 406.42 values in Tables A.1 and A.2.
Test effect CT CT CT CT CT CT CT CT
Currency POT 5. Conclusion
CS test 139.42
Test effect CT This study aimed to analyze the behavioral dynamics of the
cryptocurrencies markets by evaluating herding behavior and the
*
: p < 0.10, : p < 0.05, and : p < 0.01.
** ***
contagion effect in the period from March 2015 to December
2018 using 1344 daily observations of 50 currencies with higher
Table 9
liquidity and market volume in the digital environment
CS contagion test by year.
Regarding herding behavior, the modified CSAD model detected
Coins in which there was no contagion
a weak herd effect (statistically significant at the 15% level) and
2015–2018 2015 2016 2017 2018
the modified CSSD model detected a herd effect in the lower
– XMR BITUSD MAID DGB movement in this market. The Hwang and Salmon (2004) state-
Tether VIA Nxt
space model with the Kalman filter successfully captured the herd-
MAID BBR VIA
RDD XPM Burst ing behavior and disclosed extreme periods of adverse herding
UBQ XWC (demonstrating higher risk aversion).
BLOCK FTC As regards the contagion effect, the modified FR test was able to
XDN POT
find evidence of the Bitcoin contagion in other currencies in all the
UNO
cases except for the Tether Dollar BITCNY and ECC (in each year and
in the full period). These two currencies have inflationary control
and application particularities that render them immune to the
market effects that Bitcoin propagates in the digital environment.

Table A.1
Cokurtosis contagion test (CK) for the period 2015–2018.
Currency ETH XRP XLM LTC XMR Tether DASH DOGE
CK test 70 445*** 147 759*** 27 251*** 11 839*** 5876*** 18 132*** 3542*** 6602***
Test effect CT CT CT CT CT CT CT CT
Currency BTS BCN DGB XVG MAID MONA RDD Nxt
CK test 5428*** 13 501*** 64 058*** 4594*** 884*** 37 145*** 13 907*** 2355***
Test effect CT CT CT CT CT CT CT CT
Currency SYS PPC NXS GRS VTC EMC2 UBQ BLOCK
CK test 5747*** 997*** 2838*** 8863*** 15 457*** 24 343*** 14 270 839*** 12 349***
Test effect CT CT CT CT CT CT CT CT
Currency NAV BITCNY NVC XDN VIA BAY Burst XWC
CK test 413 846*** 2 009 306*** 4929*** 13 539*** 5342*** 15 132*** 9726*** 24 438***
Test effect CT CT CT CT CT CT CT CT
Currency CLOAK BBR UNO NLG BITUSD GAME CSC XCP
CK test 32 418*** 20 647*** 34 035*** 11 195*** 847 552*** 24 517*** 2291*** 8031***
Test effect CT CT CT CT CT CT CT CT
Currency NMC FTC XPM CRW FLO BLK ECC DMD
CK test 2195*** 43 050*** 11 390*** 21 097*** 4399*** 16 343*** 7739*** 8254***
Test effect CT CT CT CT CT CT CT CT
Currency POT
CK test 18 126***
Test effect CT
*
: p < 0.10,** : p < 0.05, and*** : p < 0.01.
 P.V.J. da Gama Silva, M.C. Klotzle, A.C.F. Pinto et al. / Journal of Behavioral and Experimental Finance 22 (2019) 41–50 49

Table A.2
Covolatility contagion test (CV) 2015–2018.
Currency ETH XRP XLM LTC XMR Tether DASH DOGE
CV test 104 179*** 210 136*** 35 881*** 14 802*** 7233*** 21 286*** 4344*** 8161***
Test effect CT CT CT CT CT CT CT CT
Currency BTS BCN DGB XVG MAID MONA RDD Nxt
CV test 6592*** 16 896*** 86 288*** 5124*** 923*** 49 827*** 17 520*** 2704***
Test effect CT CT CT CT CT CT CT CT
Currency SYS PPC NXS GRS VTC EMC2 UBQ BLOCK
CV test 6856*** 1085*** 2993*** 10 758*** 19 758*** 31 627*** 20 987 570*** 15 428***
Test effect CT CT CT CT CT CT CT CT
Currency NAV BITCNY NVC XDN VIA BAY Burst XWC
CV test 584 188*** 2 967 124*** 5889*** 17 006*** 6294*** 19 106*** 12 082*** 31 825***
Test effect CT CT CT CT CT CT CT CT
Currency CLOAK BBR UNO NLG BITUSD GAME CSC XCP
CV test 43 141*** 26 875*** 44 837*** 14 174*** 1 242 224*** 32 183*** 2098*** 9881***
Test effect CT CT CT CT CT CT CT CT
Currency NMC FTC XPM CRW FLO BLK ECC DMD
CV test 2373*** 57 404*** 14 261*** 27 258*** 5029*** 20 837*** 9009*** 10 257***
Test effect CT CT CT CT CT CT CT CT
Currency POT
CV test 23 431***
Test effect CT
*
: p < 0.10,** : p < 0.05, and*** : p < 0.01.

In the three other contagion models, perceived as extensions of
the FR model, considering higher-order moments as elaborated by
Fry et al. (2010) and Fry-McKibbin and Hsiao (2018), no contagion
was observed only in the test of coasymmetry in relation to Tether
Dollar (in 2015) and BITUSD (in 2016).
From the results of this study, it was possible to notice an
interdependence of the other currencies with CRIX and with the
main digital currency and pioneer in its environment, Bitcoin. It
was also possible to realize that in the cryptocurrency market
negative news are related with herding behavior, - cryptocurrency
investors are more affected by negative information than by posi-
tive information, showing risk aversion in the loss domain.
As a suggestion for future research, it would be interesting to
evaluate the herding behavior in and the contagion among the
main cryptocurrency exchanges, before and after periods of crises
or in situations leading the market to extreme down periods.
Acknowledgments
This work was carried out with the support of Conselho Na-
cional de Desenvolvimento Científico e Tecnológico (National Coun-
cil for Scientific and Technological Development - CNPq), grant
numbers 306532/2016-6 and 408470/2016-0, Fundação Carlos
Chagas Filho de Amparo à Pesquisa do Estado do Rio de Janeiro
(Carlos Chagas Filho Foundation for Research Support in the State
of Rio de Janeiro - FAPERJ), Brazil, grant number E_03/2018/238739
and Queiroz Galvão Energias Renováveis through the ANEEL R&D
program.
Appendix
See Tables A.1 and A.2.
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