GameStop: It's not about the money, it's about sending a message: A case study on the GameStop Short Squeeze and Limitations to Market Efficieny

Abstract

The fluctuation in stock market prices and their determinants have gained significant interest in all times of economics. On January 28, 2021, the U.S company GameStop’s stock price peaked at 483 USD, resulting in a monthly growth of 2,500%. Ten days later, the stock price was down to 50 USD. Meanwhile, the short interest fell from above 100% to ca. 33%. The volatile stock returns resulted from a coordinated strategy powered by online hype over a rebellion against traditional Wall Street power. The coordination took place on the subreddit r/WallStreetBets. Hedge funds holding short positions ended up as the biggest losers. The episode marked the arrival of a new type of investor, making greater use of social media in decision making, especially in the form of memes, which resulted in positive investment sentiment. This paper tests whether sentiment and activity extracted from social media impact pricing and volume towards the GameStop stock. Specifically, we evaluate whether GameStop intraday stock returns react to sentiment related to the company itself. The entry of the new type of investors raises questions about traditional financial pricing models and the efficient market hypothesis. There is a need to update the models as they view investors more as rational individuals and state that share prices reflect all available information. We provide evidence that social media sentiment and activity significantly influence the dynamics of the price and trading volume of the GameStop stock. Using 30-minute frequencies for stock returns for GameStop, we show that price dynamics are susceptible to social media sentiment pricing factors. We show that the share movements during the volatile period may have been a violation of the weak form of market efficiency, as described by Fama (1970). A complete exploration of the meme stock phenomenon is yet to happen. Understanding how social media affects the stock market can help investors and market authorities make decisions. The GameStop episode has led to a discussion about the democratization of stock markets, with several arguing for further tightening to avoid similar episodes in the future. We argue that the reduction in market efficiency must balance against the attempt to ensure similar anomalies do not occur in the future.