Meme stock and systemic risk

“Meme shares” are a dangerous group. Susceptible to wild and sudden swings based mostly on rumors and on-line message board discussions, it’s traded largely by retail buyers on the lookout for the following massive factor with little regard for valuation fashions or the underlying fundamentals of an organization.

Whereas the actions of meme shares happen seemingly at random and current unsystematic threat, how do meme shares transfer relative to inventory market indices and different meme shares?

We discovered that after a inventory turns into a MEM, it not solely exhibits better general threat, or volatility, but in addition better correlation with US inventory indices and with different MEM shares. In actual fact, as soon as a inventory reaches meme standing, its correlation with different meme shares jumps by greater than 80%, in accordance with our estimates.

So what’s a meme inventory? In our evaluation, we rank them based mostly on their significance on Reddit’s WallStreetBets dialogue board. As soon as a inventory crosses a discussion board’s explicit curiosity threshold, we categorize it as a meme and document the date it reached that benchmark. AMC Theaters, GameStop, Tesla, Mattress Bathtub & Past, and Tilray, amongst others, have garnered the requisite consideration on WallStreetBets, in addition to amongst retailers and the media, to qualify as memes and have been added to our record.

Utilizing this dataset, we first examined how a inventory’s affiliation with numerous indices modified as soon as it turned a meme. We discovered that meme shares jumped considerably with respect to the Russell 2000 as soon as it entered meme territory: its correlation coefficient elevated from 0.29 to 0.39. Their correlation with the S&P 500 elevated from 0.26 to 0.27.

Massive transfer days we outlined as these when the meme inventory worth swings by at the very least 10%. When the inventory meme jumped 10% or greater, the S&P 500 rose by a median of 0.26%. On days when the meme inventory fell 10% or extra, the S&P 500 rose by a median of 0.13%. Once more, this highlights the optimistic relationship between Mimi shares and the market.

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So how has the correlation of meme shares modified over time?

The common correlation between prepared shares was 0.21. Nonetheless, as soon as they turned meme shares, their correlation with one another jumped to 0.38. This represents an 80% improve in visitors shared with fellow meme shares.

For context, GameStop and AMC had a correlation coefficient of 0.08 earlier than they turned memes. As soon as they crossed the meme threshold, their correlation with one another jumped to 0.45.

Volatility on an unadjusted foundation additionally rose considerably as soon as the inventory reached meme standing. The common volatility of the preliminary inventory was 83%. That jumped to 106% as soon as they turned memes. For instance, AMC’s volatility elevated from 134% yoy earlier than the meme to 239% yoy after the meme.

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Altogether, the inventory traded intently with the Russell 2000 Index of Small Firms and with different meme shares after they turned memes. This rising correlation signifies that there are dangers that buyers could need to be careful for.

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All posts are the opinion of the writer. As such, it shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of the CFA Institute or the writer’s employer.

Picture credit score: © Getty Photos / Bruce Bennett / Employees

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