“Meme stocks” are a risky bunch. Prone to wild and unpredictable swings based on rumors and Internet message board discussions, they are mostly traded by retail investors looking for the next big thing and with little regard for the valuation model or the underlying fundamentals of the business.
While meme stocks move at random and exhibit uncertain risk, how do meme stocks move relative to the stock market index and other meme stocks?
Once a stock became a meme, we found that it not only displayed greater total risk, or volatility, but also displayed greater correlation with US stock indexes and other meme stocks. In fact, once a stock achieves meme status, its correlation with other meme stocks exceeds 80%, by our estimates.
So what is mem stock? In our analysis, we define them based on their prominence on Reddit’s WallStreetBets discussion board. Once a stock crossed a specific attention threshold on the forum, we classified it as a meme and recorded the date it reached that benchmark. AMC Theatres, Gamestop, Tesla, Bed Bath & Beyond, and Tilray, all among others, along with WallStreetbets, among retail traders and the media, garnered the requisite attention to qualify as memes and were added to our list.
Using this dataset, we first examined how the correlation of stocks with different indices changed after a meme was created. Entering mem territory we found that mem stocks jumped the most in correlation with the Russell 2000: their correlation coefficient increased from 0.29 to 0.39. Their correlation with the S&P 500 increased from 0.26 to 0.27.
We defined big move days as the days when the price of a meme stock went up by at least 10%. When a meme stock jumped 10% or more, the S&P 500 rose an average of 0.26%. On days when a meme stock fell 10% or more, the S&P 500 gained an average of 0.13%. Again, this meme highlights a positive correlation between stocks and the market.
|technology selection index||S&P 500 Index||Russell 2000 Index|
|Meme Stocks (First)||0.244||0.260||0.288|
|Meme Stocks (later)||0.285||0.269||0.394|
So how did the correlation of meme stocks change over time?
The average correlation between pre-mem stocks was 0.21. Once they became meme stocks, however, their relationship to each other dropped to 0.38. That’s an over 80% increase in the co-movement with fellow meme shares.
For reference, GameStop and AMC had a correlation coefficient of 0.08 before they became memes. Once they crossed the mem threshold, their correlation with each other dropped to 0.45.
Volatility on an unadjusted basis also increased substantially after a stock gained meme status. Pre-mem stocks had an average volatility of 83%. After becoming a meme, it increased to 106 percent. For example, the volatility of AMC increased from 134% pre-mem to 239% post-mem on a yearly basis.
meme stock correlation
|Earlier becoming meme stocks||0.208|
|Later becoming meme stocks||0.378|
Overall, the shares traded more closely with the Russell 2000 Small-Cap Index and other meme stocks when 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 views of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of the CFA Institute or the author’s employer.
Image Credits: © Getty Images/Bruce Bennett/Staff
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