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

Can unstructured text data from social media help explain the drivers of large asset price fluctuations? This paper investigates how social forces affect asset prices, by using machine learning tools to extract beliefs and positions of `hype' traders active on Reddit's WallStreetBets (WSB) forum. We empirically document that sentiments expressed by WSB users about assets' future performances (bullish or bearish) are in part due to the sentiments of their peers and past asset returns. Our stylized model shows that information assimilation from peers can help explain return predictability and reversals, as well as bubble dynamics. The paper directly estimates the effect of WSB activity on asset prices. We document: that retail trader demand follows WSB discussions through using Trade and Quote data, the predictability of prices from retail trader discourse, the amplified market impact of idiosyncratic investor sentiment from viral content online, and the greater exposure of hype investors to bubbles in the markets.

• 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 > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading

References

Agrawal, S., Azar, P. D., Lo, A. W. & Singh, T. (2018), ‘Momentum, mean-reversion, and social media: Evidence from stocktwits and twitter’, The Journal of Portfolio Management 44(7), 85–95.

Anderson, C. A., Lepper, M. R. & Ross, L. (1980), ‘Perseverance of social theories: The role of explanation in the persistence of discredited information.’, Journal of Personality and Social Psychology 39(6), 1037.

Antweiler, W. & Frank, M. Z. (2004), ‘Is all that talk just noise? the information content of internet stock message boards’, The Journal of finance 59(3), 1259–1294.

Araci, D. (2019), ‘Finbert: Financial sentiment analysis with pre-trained language models’, arXiv preprint arXiv:1908.10063 .

Athey, S. & Imbens, G. W. (2017), ‘The state of applied econometrics: Causality and policy evaluation’, Journal of Economic Perspectives 31(2), 3–32.

Azar, P. D. & Lo, A. W. (2016), ‘The wisdom of twitter crowds: Predicting stock market reactions to fomc meetings via twitter feeds’, The Journal of Portfolio Management 42(5), 123–134.

Balasubramaniam, V., Campbell, J. Y., Ramadorai, T. & Ranish, B. (2023), ‘Who owns what? a factor model for direct stockholding’, The Journal of Finance 78(3), 1545–1591.

Banerjee, A., Chandrasekhar, A. G., Duflo, E. & Jackson, M. O. (2013), ‘The diffusion of microfinance’, Science 341(6144).

Banerjee, A. V. (1993), ‘The economics of rumours’, The Review of Economic Studies 60(2), 309–327.

Barberis, N., Greenwood, R., Jin, L. & Shleifer, A. (2018), ‘Extrapolation and bubbles’, Journal of Financial Economics 129(2), 203–227.

Bifulco, R., Fletcher, J. M. & Ross, S. L. (2011), ‘The effect of classmate characteristics on post-secondary outcomes: Evidence from the add health’, American Economic Journal: Economic Policy 3(1), 25–53.

Black, F. (1986), ‘Noise’, The Journal of Finance 41(3), 528–543.

Boehmer, E., Jones, C. M., Zhang, X. & Zhang, X. (2021), ‘Tracking retail investor activity’, The Journal of Finance 76(5), 2249–2305.

Bond, R. M., Fariss, C. J., Jones, J. J., Kramer, A. D., Marlow, C., Settle, J. E. & Fowler, J. H. (2012), ‘A 61-million-person experiment in social influence and political mobilization’, Nature 489(7415), 295–298.

Bordalo, P., Gennaioli, N., Kwon, S. Y. & Shleifer, A. (2021), ‘Diagnostic bubbles’, Journal of Financial Economics 141(3), 1060–1077.

Bouchaud, J.-P. & Potters, M. (2003), Theory of Financial Risk and Derivative Pricing: From Statistical Physics to Risk Management, 2 edn, Cambridge University Press.

Bradley, D., Hanousek Jr., J., Jame, R. & Xiao, Z. (2021), Place your bets? the market consequences of investment research on reddit’s wallstreetbets, Technical report, SSRN.

Bramoullé, Y., Djebbari, H. & Fortin, B. (2020), ‘Peer effects in networks: A survey’, Annual Review of Economics 12, 603–629.

Breza, E. & Chandrasekhar, A. G. (2019), ‘Social networks, reputation, and commitment: evidence from a savings monitors experiment’, Econometrica 87(1), 175–216.

Bursztyn, L., Ederer, F., Ferman, B. & Yuchtman, N. (2014), ‘Understanding mechanisms underlying peer effects: Evidence from a field experiment on financial decisions.’, Econometrica 82(4), 1273.

Chen, H., De, P., Hu, Y. J. & Hwang, B.-H. (2014), ‘Wisdom of crowds: The value of stock opinions transmitted through social media’, The Review of Financial Studies 27(5), 1367–1403.

Chen, H. & Hwang, B.-H. (2022), ‘Listening in on investor’s thoughts and conversations’, Journal of Financial Economics 145(2, Part B), 426–444.

Cookson, J. A., Engelberg, J. E. & Mullins, W. (2022), ‘Echo Chambers’, The Review of Financial Studies 36(2), 450–500.

Cookson, J. A. & Niessner, M. (2020), ‘Why don’t we agree? evidence from a social network of investors’, The Journal of Finance 75(1), 173–228.

Devlin, J., Chang, M.-W., Lee, K. & Toutanova, K. (2018), ‘Bert: Pre-training of deep bidirectional transformers for language understanding’, arXiv preprint arXiv:1810.04805 .

Duflo, E., Dupas, P. & Kremer, M. (2011), ‘Peer effects, teacher incentives, and the impact of tracking: Evidence from a randomized evaluation in Kenya’, American Economic Review 101(5), 1739–74.

Epple, D. & Romano, R. E. (2011), Peer effects in education: A survey of the theory and evidence, in ‘Handbook of social economics’, Vol. 1, Elsevier, pp. 1053–1163.

Gabaix, X. & Koijen, R. S. (2020), Granular instrumental variables, Technical report, National Bureau of Economic Research.

Gabaix, X. & Koijen, R. S. (2021), In search of the origins of financial fluctuations: The inelastic markets hypothesis, Technical report, National Bureau of Economic Research.

Galaasen, S., Jamilov, R., Juelsrud, R. & Rey, H. (2020), Granular credit risk, Technical report, National Bureau of Economic Research.

Galeotti, A., Golub, B. & Goyal, S. (2020), ‘Targeting interventions in networks’, Econometrica 88(6), 2445–2471.

Garber, P. M. (1989), ‘Tulipmania’, Journal of Political Economy 97(3), 535–560.

Glaeser, E. L. & Nathanson, C. G. (2017), ‘An extrapolative model of house price dynamics’, Journal of Financial Economics 126(1), 147–170.

Golub, B. & Jackson, M. O. (2010), ‘Naive learning in social networks and the wisdom of crowds’, American Economic Journal: Microeconomics 2(1), 112–149.

Greenwood, R., Shleifer, A. & You, Y. (2019), ‘Bubbles for fama’, Journal of Financial Economics 131(1), 20–43.

Heimer, R. Z. (2016), ‘Peer pressure: Social interaction and the disposition effect’, The Review of Financial Studies 29(11), 3177–3209.

Hellwig, C. & Veldkamp, L. (2009), ‘Knowing what others know: Coordination motives in information acquisition’, The Review of Economic Studies 76(1), 223–251.

Hirshleifer, D. (2015), ‘Behavioral finance’, Annual Review of Financial Economics 7, 133–159.

Hirshleifer, D. (2020), ‘Presidential address: Social transmission bias in economics and finance’, The Journal of Finance 75(4), 1779–1831.

Hirshleifer, D., Peng, L. & Wang, Q. (2021), ‘Social networks and market reactions to earnings news’, Available at SSRN 3824022.

Hu, D., Jones, C. M., Zhang, V. & Zhang, X. (2021), The rise of reddit: How social media affects retail investors and short-sellers’ roles in price discovery, Technical report, SSRN.

Lahno, A. M. & Serra-Garcia, M. (2015), ‘Peer effects in risk taking: Envy or conformity?’, Journal of Risk and Uncertainty 50(1), 73–95.

MacKinnon, J. G. & White, H. (1985), ‘Some heteroskedasticity-consistent covariance matrix estimators with improved finite sample properties’, Journal of Econometrics 29(3), 305–325.

Mancini, A., Desiderio, A., Di Clemente, R. & Cimini, G. (2022), ‘Self-induced consensus of reddit users to characterise the gamestop short squeeze’, Scientific reports 12(1), 13780.

Ozsoylev, H. N., Walden, J., Yavuz, M. D. & Bildik, R. (2014), ‘Investor networks in the stock market’, The Review of Financial Studies 27(5), 1323–1366.

Patacchini, E. & Zenou, Y. (2016), ‘Social networks and parental behavior in the intergenerational transmission of religion’, Quantitative Economics 7(3), 969–995.

Pearson, N. D., Yang, Z. & Zhang, Q. (2021), ‘The chinese warrants bubble: Evidence from brokerage account records’, The Review of Financial Studies 34(1), 264–312.

Pedersen, L. H. (2022), ‘Game on: Social networks and markets’, Journal of Financial Economics 146(3), 1097–1119.

Pool, V. K., Stoffman, N. & Yonker, S. E. (2015), ‘The people in your neighborhood: Social interactions and mutual fund portfolios’, The Journal of Finance 70(6), 2679–2732.

Ross, L., Lepper, M. R. & Hubbard, M. (1975), ‘Perseverance in self-perception and social perception: biased attributional processes in the debriefing paradigm.’, Journal of Personality and Social Psychology 32(5), 880.

Sabherwal, S., Sarkar, S. K. & Zhang, Y. (2011), ‘Do internet stock message boards influence trading? Evidence from heavily discussed stocks with no fundamental news’, Journal of Business Finance & Accounting 38(9-10), 1209–1237.

Sacerdote, B. (2011), Peer effects in education: How might they work, how big are they and how much do we know thus far?, in ‘Handbook of the Economics of Education’, Vol. 3, Elsevier, pp. 249–277.

Securities & Commission, E. (1963), ‘Report of special study of securities markets of the securities and exchange commission’, House Document 95(4).

Shiller, R. J. (1984), Stock prices and social dynamics, Technical Report 2, The Brookings Institution.

Shiller, R. J. (2005), Irrational Exuberance: (Second Edition), Princeton University Press.

Shiller, R. J. (2017), ‘Narrative economics’, American Economic Review 107(4), 967–1004.

Veldkamp, L. L. (2006), ‘Media frenzies in markets for financial information’, American Economic Review 96(3), 577–601.

Voitalov, I., van der Hoorn, P., van der Hofstad, R. & Krioukov, D. (2019), ‘Scale-free networks well done’, Physical Review Research 1(3), 033034.

Weidmann, B. & Deming, D. J. (2021), ‘Team players: How social skills improve team performance’, Econometrica 89(6), 2637–2657.

Zenou, Y. (2016), ‘Key players’, The Oxford Handbook of the Economics of Networks 11.