The Tail Wagging the Dog: How Do Meme Stocks Affect Market Efficiency?

Abstract

During the GameStop frenzy, Robinhood Markets Inc. made an unprecedented move by pausing the purchase of meme stocks, which represent a small segment of the market, from January 28th to February 5th, 2021. To evaluate the impact of this ban on market efficiency, we created two meme stock indices based on the lists of restricted stocks and conducted robust tests utilizing daily changes in these indices and the S&P 500 index. Our analysis suggests that meme stock trading does not have a negative impact on market efficiency. Furthermore, upon analyzing hourly data, we identified some puzzling correlations during the trading ban period. Specifically, we noticed that the illiquidity and volatility of both the meme stock market and S&P 500 increased, which raises concerns about a wider, unintended impact of the ban.

Keywords: Market Efficiency; Illiquidity; Meme Stock; GameStop; Social Trading; Trading Restriction.

JEL Classification: G14; G12; G41