What Makes Cryptocurrencies Special? Investor Sentiment and Return Predictability During the Bubble

36 Pages Posted: 28 Jun 2019 Last revised: 12 Jul 2019

See all articles by Cathy Yi‐Hsuan Chen

Cathy Yi‐Hsuan Chen

University of Glasgow, Adam Smith Business School; Humboldt Universität zu Berlin

Romeo Despres

affiliation not provided to SSRN

Li Guo

Singapore Management University, Lee Kong Chian School of Business

Thomas Renault

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES)

Date Written: June 3, 2019

Abstract

The 2017 bubble on the cryptocurrency market recalls our memory in the dot-com bubble, during which hard-to-measure fundamentals and investors' illusion for brand new technologies led to overvalued prices. Benefiting from the massive increase in the volume of messages published on social media and message boards, we examine the impact of investor sentiment, conditional on bubble regimes, on cryptocurrencies aggregate return prediction. Constructing a crypto-specific lexicon and using a local-momentum autoregression model, we find that the sentiment effect is prolonged and sustained during the bubble while it turns out a reversal effect once the bubble collapsed. The out-of-sample analysis along with portfolio analysis is conducted in this study. When measuring investor sentiment for a new type of asset such as cryptocurrencies, we highlight that the impact of investor sentiment on cryptocurrency returns is conditional on bubble regimes.

Keywords: Cryptocurrency; Sentiment; Bubble; Return Predictability

JEL Classification: G02; G10; G12

Suggested Citation

Chen, Cathy Yi‐Hsuan and Despres, Romeo and Guo, Li and Renault, Thomas, What Makes Cryptocurrencies Special? Investor Sentiment and Return Predictability During the Bubble (June 3, 2019). Available at SSRN: https://ssrn.com/abstract=3398423 or http://dx.doi.org/10.2139/ssrn.3398423

Cathy Yi‐Hsuan Chen (Contact Author)

University of Glasgow, Adam Smith Business School ( email )

University Avenue
Glasgow, G12 8QQ
United Kingdom
01413305065 (Phone)

HOME PAGE: http://https://gla.cathychen.info

Humboldt Universität zu Berlin ( email )

Unter den Linden 6,
Berlin, 10117
Germany
03020935631 (Phone)
10099 (Fax)

Romeo Despres

affiliation not provided to SSRN

Li Guo

Singapore Management University, Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore
Singapore

Thomas Renault

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES) ( email )

106-112 Boulevard de l'hopital
106-112 Boulevard de l'Hôpital
Paris Cedex 13, 75647
France

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