News-Driven Peer Co-Movement in Crypto Markets

61 Pages Posted: 6 May 2020 Last revised: 7 Sep 2021

See all articles by Gustavo Schwenkler

Gustavo Schwenkler

Santa Clara University - Department of Finance

Hannan Zheng

Fidelity Investments, Inc.; Boston University - Department of Finance & Economics

Date Written: April 10, 2020

Abstract

When large idiosyncratic shocks hit a cryptocurrency, some of its peers experience unusually large returns of the opposite sign. The co-movement is concentrated among peers that are co-mentioned with shocked cryptos in the news, and that are listed in the same exchanges as shocked cryptos. It is a form of mis-pricing that vanishes after several weeks, giving rise to predictable returns. We propose a profitable trading strategy that exploits this predictability, and explain our results with a slow information processing mechanism. To establish our results, we develop a novel natural language processing technology that identifies crypto peers from news data. Our results highlight the news as a key driver of co-movement among peer assets.

Keywords: Cryptocurrencies, peers, co-movement, financial news, natural language processing.

JEL Classification: G10, G14, C82

Suggested Citation

Schwenkler, Gustavo and Zheng, Hannan, News-Driven Peer Co-Movement in Crypto Markets (April 10, 2020). Available at SSRN: https://ssrn.com/abstract=3572471 or http://dx.doi.org/10.2139/ssrn.3572471

Gustavo Schwenkler (Contact Author)

Santa Clara University - Department of Finance ( email )

Santa Clara, CA 95053
United States

Hannan Zheng

Fidelity Investments, Inc. ( email )

United States

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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