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

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  • Semenova, Valentina
  • Winkler, Julian

Abstract

This paper develops an empirical and theoretical case for how `hype' among retail investors can drive large asset fluctuations. We use the dataset of discussions on WallStreetBets (WSB), an online investor forum with over nine million followers as of April 2021, to show how excitement about trading opportunities can ripple through an investor community with large market impacts. This paper finds empirical evidence of psychological contagion among retail investors by exploiting differences in stock price fluctuations and discussion intensity. We show that asset discussions on WSB are self-perpetuating: an initial set of investors attracts a larger and larger group of excited followers. Sentiments about future stock performance also spread from one individual to the next, net of any fundamental price movements. Leveraging these findings, we develop a model for how social contagion impacts prices. The proposed model and simulations show that social contagion has a destabilizing effect on markets. Finally, we establish a causal relationship between WSB activity and financial markets using an instrumental variable approach.

Suggested Citation

  • Semenova, Valentina & Winkler, Julian, 2021. "Reddit's self-organised bull runs: Social contagion and asset prices," MPRA Paper 107575, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:107575
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    References listed on IDEAS

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    1. Robert J. Shiller, 1984. "Stock Prices and Social Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 457-510.
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    Cited by:

    1. Ramit Sawhney & Shivam Agarwal & Vivek Mittal & Paolo Rosso & Vikram Nanda & Sudheer Chava, 2022. "Cryptocurrency Bubble Detection: A New Stock Market Dataset, Financial Task & Hyperbolic Models," Papers 2206.06320, arXiv.org.
    2. Arnold, Lutz & Russ, David, 2024. "Listening to the noise: On price efficiency with dynamic trading," Discussion Papers 19/2024, Deutsche Bundesbank.

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    More about this item

    Keywords

    Network Economics; Opinion Dynamics; Natural Language Processing; Behavioral Finance;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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