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Democratization of Retail Trading: Can Reddit's WallStreetBets Outperform Investment Bank Analysts?

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  • Tolga Buz
  • Gerard de Melo

Abstract

The recent hype around Reddit's WallStreetBets (WSB) community has inspired research on its impact on our economy and society. Still, one important question remains: Can WSB's community of anonymous contributors actually provide valuable investment advice and possibly even outperform top financial institutions? We present a data-driven empirical study of investment recommendations of WSB in comparison to recommendations made by leading investment banks, based on more than 1.6 million WSB posts published since 2018. %enriched with stock market data. To this end, we extract and evaluate investment recommendations from WSB's raw text for all S&P 500 stocks and compare their performance to more than 16,000 analyst recommendations from the largest investment banks. While not all WSB recommendations prove profitable, our results show that they achieve average returns that compete with the best banks and outperform them in certain cases. Furthermore, the WSB community has been better than almost all investment banks at detecting top-performing stocks. We conclude that WSB may indeed constitute a freely accessible, valuable source of investment advice.

Suggested Citation

  • Tolga Buz & Gerard de Melo, 2022. "Democratization of Retail Trading: Can Reddit's WallStreetBets Outperform Investment Bank Analysts?," Papers 2301.00170, arXiv.org.
    • Handle: RePEc:arx:papers:2301.00170
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    References listed on IDEAS

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    1. Philippe van der Beck & Coralie Jaunin, 2021. "The Equity Market Implications of the Retail Investment Boom," Swiss Finance Institute Research Paper Series 21-12, Swiss Finance Institute.
    2. Tolga Buz & Gerard de Melo, 2021. "Should You Take Investment Advice From WallStreetBets? A Data-Driven Approach," Papers 2105.02728, arXiv.org.
    3. repec:swn:wpaper:2018-01 is not listed on IDEAS
    4. Umar, Zaghum & Gubareva, Mariya & Yousaf, Imran & Ali, Shoaib, 2021. "A tale of company fundamentals vs sentiment driven pricing: The case of GameStop," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    5. Di Muzio, Tim, 2021. "GameStop Capitalism. Wall Street vs. The Reddit Rally (Part I)," EconStor Preprints 229951, ZBW - Leibniz Information Centre for Economics.
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    8. repec:men:wpaper:76_2021 is not listed on IDEAS
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