WallStreetBets Forum as Source of Investment IdeasJohannes Röll 22 / March / 21 Visitors: 13
The GameStop surge shows how vulnerable financial markets are to mobilizing a crowd of investors on social media.
Investor mania is a well-established topic in economics (for example, within the framework of narrative economics, which Robert Schiller writes about). However, a published Oxford University study on the self-organizing of Reddit for stock surges shows steps in the formation of interest in certain stocks on social media. Thanks to the hype and viral spread (hype), interest could be supported by the bullish rally in retail investors that we saw in GameStop and other promotions. (You can read the essence of the story with the growth of GameStop shares here).
The article by Valentina Semyonova and Julian Wickler is a pleasure in reading a source on a topic circling around GameStop - here the use of complex economics methods (complexity economics), more specifically - they take data in RTF format found on the Wallstreetbets forum, which are analyzed using natural language (NLP) and opinion dynamics models (OD). That is, it is a beautiful work in behavioral finance, where tracking endogenous fluctuations in stock prices has become a key task of empirical work.
User Impact on WallStreetBets (WSB) is measured by tracking the likelihood that a user will start a new discussion on an asset based on previous discussion on the same asset as measured by their comment history.
Using this method, it has been observed that users who comment on one discussion regarding a particular asset are about four times more likely to start a new discussion of that asset in the future. Moreover, the probability increases with each additional discussion. This is a compelling sign that investment strategies are replicated through social interaction. This is further supported by the findings that the opinions expressed in the related submissions are highly correlated across the set of spatial regression models. In particular, this means that bearish sentiment appears to be spreading more than their bullish counterparts. Therefore, such growth.
Three key observations of the authors of this paper on qualitative understanding of the behavior of non-institutional investors are also interesting.
1) The trades promoted on the platform are usually high risk gambling in options markets. Thus, the striking nature of these transactions stands out as a departure from traditional portfolio theory.
2) Users use a mix of stories, sometimes sarcastic in tone, in addition to suggestions or seeking trading advice. That being said, several narratives assessed using a thematic model consistently follow real-world trends such as the American elections, the legalization of marijuana and the COVID-19 pandemic.
3) Several assets dominate the conversation. In fact, the frequency distribution of the views and associated comments is strongly tail-based, with a tail index of around 0.9. More extreme than the typical frequency distribution of words, which is why some assets not only dominate the general discourse, but constantly evolve in popularity to set the tone for discourse.
In other words, users buy (or sell) stocks not because of some fundamental pattern or news, but because other users are also buying (or selling) stocks. This effect is especially strong in bouts of selling, pointing to interesting psychological patterns of investor panic during a downturn. Social contamination occurs - a well-documented phenomenon.
Fortunately, social contagion takes time to develop and is traceable. It may be necessary to tighten trading limits on stocks that are demonstrating frantic activity to prevent destabilizing market movements. Perhaps margin requirements should be increased for shares that are redeemable by retail investors. In any case, regulators need to act to ensure that markets are adequately capitalized and that new developments do not become a source of systemic risk that such actions can manifest.
Johannes Röll was born 1978 in Brilon,Germany. Graduated RWTH Aachen University. Over the past ten years he worked as Head of the plastic card team, where he was mainly responsible for the development of the distribution, Head of sales Department and Financial Analyst,where he got experience in planning and support sales figures for branches. For the present he works as freelancer