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Comovements between heavily shorted stocks during a market squeeze: Lessons from the GameStop trading frenzy

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  • Umar, Zaghum
  • Yousaf, Imran
  • Zaremba, Adam

Abstract

We examine the comovements between stock prices of different heavily shorted companies during a short-squeeze incident. Using the recent GameStop trading frenzy as a case study, we employ wavelet coherence analyses to determine its link with other frequently shorted stocks. We demonstrate a robust positive association between GameStop prices and the performance of high short interest indices. The bubble behavior driven by retail investor herding transmits between different stocks, even from unrelated sectors. Consequently, a single short-squeeze incident may build up into a potentially broader systemic risk, casting doubt on market integrity and stability.

Suggested Citation

  • Umar, Zaghum & Yousaf, Imran & Zaremba, Adam, 2021. "Comovements between heavily shorted stocks during a market squeeze: Lessons from the GameStop trading frenzy," Research in International Business and Finance, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:riibaf:v:58:y:2021:i:c:s027553192100074x
    DOI: 10.1016/j.ribaf.2021.101453
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    Cited by:

    1. Faisal Abbas & Shoaib Ali & Imran Yousaf & Wing-Keung Wong, 2021. "Dynamics of Funding Liquidity and Risk-Taking: Evidence from Commercial Banks," JRFM, MDPI, vol. 14(6), pages 1-16, June.
    2. Umar, Zaghum & Bossman, Ahmed & Choi, Sun-Yong & Vo, Xuan Vinh, 2023. "Are short stocks susceptible to geopolitical shocks? Time-Frequency evidence from the Russian-Ukrainian conflict," Finance Research Letters, Elsevier, vol. 52(C).
    3. Umar, Zaghum & Adekoya, Oluwasegun Babatunde & Oliyide, Johnson Ayobami & Gubareva, Mariya, 2021. "Media sentiment and short stocks performance during a systemic crisis," International Review of Financial Analysis, Elsevier, vol. 78(C).
    4. Mark Marner-Hausen, 2022. "Developing a Framework for Real-Time Trading in a Laboratory Financial Market," ECONtribute Discussion Papers Series 172, University of Bonn and University of Cologne, Germany.
    5. Yousaf, Imran & Beljid, Makram & Chaibi, Anis & Ajlouni, Ahmed AL, 2022. "Do volatility spillover and hedging among GCC stock markets and global factors vary from normal to turbulent periods? Evidence from the global financial crisis and Covid-19 pandemic crisis," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    6. Nobanee, Haitham & Ellili, Nejla Ould Daoud, 2023. "What do we know about meme stocks? A bibliometric and systematic review, current streams, developments, and directions for future research," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 589-602.
    7. Khan, Muhammad Asif & Khan, Farhad & Sharif, Arshian & Suleman, Muhammad Tahir, 2023. "Dynamic linkages between Islamic equity indices, oil prices, gold prices, and news-based uncertainty: New insights from partial and multiple wavelet coherence," Resources Policy, Elsevier, vol. 80(C).
    8. Daniel Pastorek & Michal Drabek & Peter Albrecht, 2023. "Confirmation of T+35 Failures-To-Deliver Cycles: Evidence from GameStop Corp," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 73(1), pages 56-80, January.
    9. Aharon, David Y. & Baig, Ahmed S. & Delisle, R. Jared, 2022. "The impact of Robinhood traders on the volatility of cross-listed securities," Research in International Business and Finance, Elsevier, vol. 60(C).
    10. Corbet, Shaen & Goodell, John W., 2022. "The reputational contagion effects of ransomware attacks," Finance Research Letters, Elsevier, vol. 47(PB).
    11. repec:oup:jecgeo:v:50:y:2023:i:2:p:426-446. is not listed on IDEAS
    12. Yousaf, Imran & Pham, Linh & Goodell, John W., 2023. "The connectedness between meme tokens, meme stocks, and other asset classes: Evidence from a quantile connectedness approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).
    13. Jimmy E. Hilliard & Jitka Hilliard, 2023. "The GameStop short squeeze: Put–call parity and the effect of frictions before, during and after the squeeze," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(5), pages 635-661, May.
    14. Choi, Sun-Yong, 2022. "Credit risk interdependence in global financial markets: Evidence from three regions using multiple and partial wavelet approaches," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    15. Banerjee, Ameet Kumar & Sensoy, Ahmet & Goodell, John W. & Mahapatra, Biplab, 2024. "Impact of media hype and fake news on commodity futures prices: A deep learning approach over the COVID-19 period," Finance Research Letters, Elsevier, vol. 59(C).
    16. Yousaf, Imran & Riaz, Yasir & Goodell, John W, 2023. "What do responses of financial markets to the collapse of FTX say about investor interest in cryptocurrencies? Event-study evidence," Finance Research Letters, Elsevier, vol. 53(C).

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    More about this item

    Keywords

    GameStop; Wavelet coherence; Comovements; Short squeeze; Retail investors; Robinhood app; r/wallstreetbets; Investor herding; Social media; High short interest;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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