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The tail wagging the dog: How do meme stocks affect market efficiency?

Author

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  • Aloosh, Arash
  • Choi, Hyung-Eun
  • Ouzan, Samuel

Abstract

During the GameStop frenzy, Robinhood Markets Inc. made an unprecedented move by pausing the purchase of meme stocks, which represent a small segment of the market, from January 28th to February 5th, 2021. To evaluate the impact of this ban on market efficiency, we created two meme stock indices based on the lists of restricted stocks and conducted robust tests utilizing daily changes in these indices and the S&P 500 index. Our analysis suggests that meme stock trading does not have a negative impact on market efficiency. Furthermore, upon analyzing hourly data, we identified some puzzling correlations during the trading ban period. Specifically, we noticed that the illiquidity and volatility of both the meme stock market and S&P 500 increased, which raises concerns about a wider, unintended impact of the ban.

Suggested Citation

  • Aloosh, Arash & Choi, Hyung-Eun & Ouzan, Samuel, 2023. "The tail wagging the dog: How do meme stocks affect market efficiency?," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 68-78.
    • Handle: RePEc:eee:reveco:v:87:y:2023:i:c:p:68-78
    DOI: 10.1016/j.iref.2023.04.019
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    Cited by:

    1. Lou, Youcheng & Rahi, Rohit, 2023. "Information, market power and welfare," LSE Research Online Documents on Economics 120479, London School of Economics and Political Science, LSE Library.
    2. Lou, Youcheng & Rahi, Rohit, 2023. "Information, market power and welfare," Journal of Economic Theory, Elsevier, vol. 214(C).

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    More about this item

    Keywords

    Market efficiency; Illiquidity; Meme stock; GameStop; Social trading; Trading restriction;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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