Modelling financial markets during times of extreme volatility: evidence from the GameStop short squeeze

Andreev, B., Sermpinis, G. and Stasinakis, C. (2022) Modelling financial markets during times of extreme volatility: evidence from the GameStop short squeeze. Forecasting, 4(3), pp. 654-673. (doi: 10.3390/forecast4030035)

Abstract

Ever since the start of the coronavirus pandemic, lockdowns to curb the spread of the virus have resulted in an increased interest of retail investors in the stock market, due to more free time, capital, and commission-free trading brokerages. This interest culminated in the January 2021 short squeeze wave, caused in no small part due to the coordinated trading moves of the r/WallStreetBets subreddit, which has rapidly grown in user base since the event. In this paper, we attempt to discover if coordinated trading by retail investors can make them a market moving force and attempt to identify proactive signals of such movements in the post activity of the forum, to be used as a part of a trading strategy. Data about the most mentioned stocks is collected, aggregated, combined with price data for the respective stock and analysed. Additionally, we utilise predictive modelling to be able to better classify trading signals. It is discovered that despite the considerable capital that retail investors can direct by coordinating their trading moves, additional factors, such as very high short interest, need to be present to achieve the volatility seen in the short squeeze wave. Furthermore, we find that autoregressive models are better suited to identifying signals correctly, with best results achieved by a Random Forest classifier. However, it became apparent that even the best performing model in our experimentation cannot make accurate predictions in extreme volatility, evidenced by the negative returns shown by conducted back-tests.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Stasinakis, Professor Charalampos and Sermpinis, Professor Georgios

Creator Roles

Sermpinis, G.: Validation, Writing – review and editing, Supervision, Project administration, Funding acquisition
Stasinakis, C.: Validation, Writing – review and editing, Supervision, Project administration, Funding acquisition

• Authors: Andreev, B., Sermpinis, G., and Stasinakis, C.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Forecasting
• Publisher: MDPI
• ISSN: 2571-9394
• ISSN (Online): 2571-9394
• Published Online: 19 July 2022
• Copyright Holders: Copyright © 2022 The Authors
• First Published: First published in Forecasting 4(3):654-673
• Publisher Policy: Reproduced under a Creative Commons License