The witching week of herding on bitcoin exchanges

Area of Science:

• Financial Markets
• Cryptocurrency Analysis
• Behavioral Finance

Background:

• Herding behavior, or mimetic trading, is a documented phenomenon in financial markets.
• Understanding herding in cryptocurrency markets, particularly around futures expiration, is crucial for market participants.
• The Chicago Mercantile Exchange (CME) offers bitcoin futures, providing a venue for this analysis.

Purpose of the Study:

• To analyze herding behavior among cryptocurrency exchanges surrounding bitcoin futures expiration on the CME.
• To investigate the temporal dynamics of herding effects before, during, and after futures expiration.
• To identify potential drivers of herding behavior in the bitcoin market.

Main Methods:

• Utilized hourly closing prices and trading volumes for bitcoin across major exchanges (December 2017-October 2020).
• Adapted the Chang, Cheng, and Khorana (2000) (CCK) method to test for conditional herding behavior.
• Employed intraday data analysis focused on the specific event of futures expiration.

Main Results:

• Significant herding behavior was observed in the week leading up to bitcoin futures expiration.
• The herding effect persisted for a few hours immediately after expiration before dissipating.
• Unconditional analysis across the study period generally indicated anti-herding behavior.

Conclusions:

• Event-specific intraday data analysis, particularly around futures expiration, is vital for understanding market dynamics.
• Information overload and sophisticated investor strategies may contribute to the observed mimetic trading.
• The findings highlight the distinct nature of herding behavior linked to specific market events versus overall market trends.