The Rise of Reddit: How Social Media Affects Retail Investors and Short-sellers’ Roles in Price Discovery
65 Pages Posted: 2 Apr 2021 Last revised: 22 Apr 2024
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
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