Asymmetric volatility spillover from retail trading of noise traders: evidence from the gamestop short squeeze

Abstract

Purpose-Recently, it has been observed that social trading and social media-based stocks are very popular especially for retail investors in the financial world. However, coordinated transactions of retail investors through social platforms carry the risk of classical noise trading, and the noise-based transactions of these investors, described as irrational investors, constitute a new source of systematic risk in the market. Considering the mentioned issues, this study aims to reveal the volatility and asymmetric volatility effects of social media-based noise trading of retail investors through the recent GameStop short squeeze. Methodology-The volatility and asymmetrical volatility spillovers from the social media-based retail transactions of the noise traders to the stock market were investigated using the EGARCH method, following Verma and Verma (2007), on the GameStop short position squeeze case. Findings-In the study, positive and statistically significant volatility spillover coefficient representing the spillover effect of the volatility in the GME index towards the NYSE Composite index and a negative and significant asymmetry coefficient revealed that the volatility spread from the GME index to the NYSE Composite index was asymmetrical. In this context, negative shocks in the GME index have a greater impact on the volatility of the NYSE Composite index than positive shocks. In addition, the findings of the study showed that there was no asymmetric volatility spillover from the NYSE Composite index to the GME index, and that past volatility in the GME index had a greater impact on present conditional volatility than the NYSE Composite index. Conclusion-This study determined that there was an asymmetrical volatility spillover from the GME index to the NYSE Composite index, and revealed that the social media-based retail transactions of noise traders may have not only volatility but also asymmetric volatility spillover effects in the markets. Keywords: GameStop, meme stocks, noise traders, retail trading, social media, asymmetric volatility JEL Codes: G10, G11, G14, G41