Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

IRTG1792DP2019 016

What makes cryptocurrencies special? Investor sentiment and return
predictability during the bubble

Cathy Yi-Hsuan Chen
Roméo Després
Li Guo
Thomas Renault

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.

Cryptocurrency; Sentiment; Bubble; Return Predictability

JEL Classification:
G02; G10; G12