The Rise of Reddit: How Social Media Affects Retail Investors and Short-sellers’ Roles in Price Discovery

60 Pages Posted: 2 Apr 2021 Last revised: 22 May 2023

See all articles by Danqi Hu

Danqi Hu

Guanghua School of Management, Peking University; Northwestern University - Kellogg School of Management

Charles M. Jones

Columbia University

Valerie Zhang

Northwestern University

Xiaoyan Zhang

Tsinghua University - PBC School of Finance

Date Written: March 14, 2021

Abstract

Using 2020-2021 data from Reddit, we examine theoretical predictions from Pedersen (2022) on how social media affects belief formation, price discovery and trading dynamics. We find that opinions of fanatic or rational investors predict opinions of naïve investors. For return predictions, higher naïve traffic and more positive fanatic and naïve tones predict returns, and more so when their influencer values are higher. For trading dynamics, higher naïve traffic and tones deter shorting flows and increase retail flows. Interestingly, when short-sellers short against naïve traffic and tones, short’s negative predictive power for returns become stronger. These findings generally support Pedersen’s predictions.

Keywords: social media, short selling, intraday trading, retail investors

JEL Classification: G11, G12, G14, G23

Suggested Citation

Hu, Danqi and Jones, Charles M. and Zhang, Valerie and Zhang, Xiaoyan, The Rise of Reddit: How Social Media Affects Retail Investors and Short-sellers’ Roles in Price Discovery (March 14, 2021). Available at SSRN: https://ssrn.com/abstract=3807655 or http://dx.doi.org/10.2139/ssrn.3807655

Danqi Hu (Contact Author)

Guanghua School of Management, Peking University ( email )

Northwestern University - Kellogg School of Management ( email )

2211 campus drive
EVANSTON, IL 60208
United States

Charles M. Jones

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Valerie Zhang

Northwestern University

2001 Sheridan Road
Evanston, IL 60208
United States

Xiaoyan Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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