Meme stocks are a risky bunch. Subject to wild and unpredictable fluctuations based on rumors and discussion on message boards, they are mostly traded by retail investors looking for the next big thing and with no regard for valuation patterns or underlying fundamentals. of the company.
While the movements of meme stocks occur seemingly randomly and pose unsystematic risk, how do meme stocks perform relative to stock indices and other meme stocks?
Once a stock becomes a meme, we have found that it not only has higher total risk or volatility, but also has a higher correlation with US stock indices and with other meme stocks. In fact, once a stock achieves meme status, its correlation with other meme stocks jumps by more than 80%, according to our estimates.
So what is a meme store? In our analysis, we define them according to their importance on Reddit’s WallStreetBets discussion board. Once a title crosses a particular attention threshold on the forum, we categorize it as a meme and record the date it reached that threshold. AMC Theatres, GameStop, Tesla, Bed Bath & Beyond, and Tilray, among others, all received the required attention on WallStreetBets, as well as among retailers and media, to be dubbed memes and added to our list.
Using this dataset, we first looked at how a stock’s correlation with various indexes changed once it became a meme. We found that meme stocks jumped the most in correlation with the Russell 2000 once they entered meme territory: their correlation coefficient jumped from 0.29 to 0.39. Their correlation with the S&P 500 fell from 0.26 to 0.27.
The big move days we have defined as those when the price of a stock itself has moved at least 10%. When a stock even jumped 10% or more, the S&P 500 rose 0.26% on average. On days when a meme stock fell 10% or more, the S&P 500 rose an average of 0.13%. Again, this highlights a positive correlation between meme stocks and the market.
|Technology Selection Index
|S&P 500 Index
|Russell 2000 Index
|Meme Stocks (Before)
|Stocks Meme (After)
So how has the correlation of meme stocks changed over time?
The average correlation between pre-meme actions was 0.21. Once they became meme stocks, however, their correlation to each other jumped to 0.38. That’s an over 80% increase in co-movement with other meme stocks.
For context, GameStop and AMC had a correlation coefficient of 0.08 before they became memes. Once they crossed the meme threshold, their correlation with each other jumped to 0.45.
Volatility on an unadjusted basis also increased significantly once a stock reached meme status. Pre-meme stocks had an average volatility of 83%. This jumped to 106% once they became memes. For example, AMC’s volatility went from 134% annualized pre-meme to 239% post-meme.
Meme Stock Correlation
|Before Become Meme Stocks
|After Become Meme Stocks
Overall, the stocks traded much more closely with the Russell 2000 Small Cap Index and with other meme stocks after they became memes. This increased correlation suggests a risk that investors may want to pay attention to.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
Image credit: ©Getty Images / Bruce Bennett / Staff
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