Do Blockchain Stocks Exhibit More Herding Behaviour than Traditional Stocks?

Abstract

While the volatile behaviour of cryptocurrency is extensively studied, the stock market’s blockchain sector, which has not been given much attention in the academic world, operates very differently from traditional stock industries. The paper hypothesizes that blockchain stocks exhibit more herding behaviour than traditional stocks and uses quantitative data analysis techniques to study it. The automotive industry is taken as a representative of traditional stocks. Cross-Sectional Absolute Deviation, the academic standard for herding behaviour, is used as the primary comparative measure between blockchain and automotive stocks. It reveals that blockchain industry has significant herding, while rational pricing mechanisms prevail in the automotive industry. Supporting this conclusion, a correlation matrix of stock prices of small market capitalisation firms in each industry is constructed, analysing how closely stock price movements in an industry are related. The correlation coefficient for blockchain stocks is 20% higher than the coefficient for automotive stocks. This indicates that blockchain stocks likely exhibit higher levels of herding. The impact of social media on stock price movements in the two industries is analysed by conducting a correlation study between Google Trends data for industry-related keywords and individual stock returns. The blockchain industry saw a significantly higher correlation, likely suggesting that social media has a stronger influence on blockchain stock price movements. Finally, the paper provides possible explanations for why herding behaviour is more prominent in the blockchain stocks compared to traditional stocks. These include absence of traditional stock valuation metrics, lack of financial knowledge and role of social media.