Social Media and the Stock Market: Trading, Price Efficiency, and Liquidity

53 Pages Posted: 1 Sep 2023 Last revised: 2 May 2024

See all articles by Kee H. Chung

Kee H. Chung

State University of New York at Buffalo - School of Management

Jenny Stanco

University at Buffalo (SUNY) - School of Management

Date Written: August 31, 2023

Abstract

This study shows that a stock's popularity on Reddit's r/WallStreetBets (WSB) (measured by the number of WSB mentions) increases trading, order imbalance, return volatility, and decreases price efficiency. The increase in trading volume reduces order-processing and inventory costs, while the increase in order imbalance raises inventory costs of market-making. Trading and order imbalances in stocks with more extensive WSB mentions are associated with lower price impacts. The positive effect of order imbalance on spreads is greater than the negative effect of trading volume on spreads, resulting in larger spreads for stocks with more WSB mentions.

Keywords: JEL classification: G12, G14 WallStreetBets, Market microstructure, Bid-ask spread, Price impact, Adverse selection costs, Inventory risk, Order-processing costs, Vector autoregression models, Earnings announcements, Retail trades, Meme stocks

JEL Classification: G12, G14

Suggested Citation

Chung, Kee H. and Stanco, Jenny, Social Media and the Stock Market: Trading, Price Efficiency, and Liquidity (August 31, 2023). Available at SSRN: https://ssrn.com/abstract=4558054 or http://dx.doi.org/10.2139/ssrn.4558054

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

Jenny Stanco

University at Buffalo (SUNY) - School of Management ( email )

255 Jacobs Management Center
Buffalo, NY 14260
United States

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