Social contagion and asset prices: Reddit’s self-organised bull runs

Semenova, Valentina and Winkler, Julian (2021): Social contagion and asset prices: Reddit’s self-organised bull runs.

Abstract

This paper develops an empirical and theoretical case for how 'hype' among retail investors can drive large asset price fluctuations. We use text data from discussions on WallStreetBets (WSB), an online investor forum with over eleven million followers as of February 2022, as a case study to demonstrate how retail investors influence each other, and how social behaviours impact financial markets. We document that WSB users adopt price predictions about assets (bullish or bearish) in part due to the sentiments expressed by their peers. Discussions about stocks are also self-perpetuating: narratives about specific assets spread at an increasing rate before peaking, and eventually diminishing in importance - a pattern reminiscent of an epidemiological setting. To consolidate these findings, we develop a model for the impact of social dynamics among retail investors on asset prices. We find that the interplay between 'trend following' and `consensus formation' determines the stability of price returns, with socially-driven investing potentially causing oscillations and cycles. Our framework helps identify components of asset demand stemming from social dynamics, which we predict using WSB data. Our predictions explain significant variation in stock market activity. These findings emphasise the role that social dynamics play in financial markets, amplified by online social media.

• Item Type: MPRA Paper
• Language: English
• Keywords: Network Economics, Opinion Dynamics, Natural Language Processing, Behavioral Finance
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D85 - Network Formation and Analysis: Theory; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading

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