Central Bank of Ireland

November 3, 2022

The echo chamber effect resounds on financial markets: a social media alert system for meme stocks 

Abstract: The short squeeze of Gamestop (GME) has revealed to the world how retail investors pooling through social media can severely impact financial markets. In this paper, we devise an early warning signal to detect suspicious users’ social network activity, which might affect the financial market stability. We apply our approach to the subreddit r/WallStreetBets, selecting both meme and non-meme stocks as case studies. The alert system is structured in two stages; the first one is based on extraordinary activity on the social network, while the second aims at identifying whether the movement seeks to coordinate the users to a bulk action. We run an event study analysis to see the reaction of the financial markets when the alert system catches social network turmoil.