Efficient markets and meme stocks: social media and volatility spillover in the GME short squeeze

Abstract

This paper examines two issues central to the recent retail finance phenomena of 'meme Stocks', using evidence from the GameStop short squeeze of early 2021. The first is the degree to which web traffic predicts abnormal returns of a stock when that stock receives a high degree of public interest. The second is the degree to which semi-exogenous assignments of popularity to a stock result in increased volatility in similar stocks, i.e., if meme stock crazes result in volatility spillovers. Using a Bayesian, Time-Varying Parameter approach, this paper estimates both the relationship between relevant web traffic (r/wallstreetbets, Twitter, Google Search) and the performance of GameStop stock, as well as volatility spillovers from GME to untargeted stocks. We find mixed evidence of a Granger-causal relationship between web traffic and GME returns. In addition, we find evidence in support of the existence of large, transient volatility spillovers.