“Mem stock” is a risky bunch. Wild and prone to unpredictable volatility based on rumors and internet message board discussions, they are traded by retail investors in search of the next big thing and pay very little attention to the underlying fundamentals of the valuation model or business.
Although the movement of meme stocks appears to be random and exhibits unreasonable risk, how do meme stocks relate to stock market indices and other meme stocks?
Once a stock becomes a meme, as we have seen, it not only exhibits a larger total risk, or volatility, but also a greater correlation with the U.S. stock index and other meme stocks. In fact, once a stock achieves meme status, its relationship with other meme stocks exceeds 80%, according to our estimates.
So what is meme stock? In our analysis, we define them based on their specificity on Reddit’s Wall Streetbates discussion board. Once a stock forum exceeds a particular focus, we classify it as a meme and record the time it took to reach that standard. AMC Theater, Gamestop, Tesla, Bed Bath and Beyond, and Tiller, among others, all draw the necessary attention to Wall StreetBates, as well as retailers and the media, to qualify as memes and be added to our list.
Using this dataset, we first examined how the correlation of a stock with different indicators changes when it becomes a meme. We have seen that meme stocks jumped the most in the correlation with Russell 2000 when they entered the meme region: their correlation coefficient increased from 0.29 to 0.39. Their correlation with the S&P 500 increased from 0.26 to 0.27.
The days of the big move we defined as when the price of a meme stock rose at least 10%. When a meme stock rises 10% or more, the S&P 500 rises 0.26% on average. On days when a meme stock fell 10% or more, the S&P 500 rose 0.13% on average. Again, this highlights a positive relationship between meme stocks and the market.
|Technology selection index||S&P 500 Index||Russell 2000 Index|
|Mem stock (before)||0.244||0.260||0.288|
|Mem stock (later)||0.285||0.269||0.394|
So how has the relationship between meme stocks changed over time?
The average relationship between pre-meme stocks was 0.21. Once they become meme stock, their relationship with each other jumps to 0.38. This is more than 80% when co-moving with peer meme stocks.
For context, GameStop and AMC had a correlation coefficient of 0.08 before meme. Once they cross the meme threshold, their relationship with each other jumps to 0.45.
Instability on an unreasonable basis also increases significantly when a stock acquires meme status. The average volatility of pre-mem stocks was 83%. Once they become memes they jump to 106%. For example, AMC’s volatility has increased from 134% of pre-memes to 239% of post-memes on an annual basis.
Mem stock reciprocity
|Before Mem is becoming stock||0.208|
|Later Mem is becoming stock||0.378|
After all, stocks traded more closely with the Russell 2000 Small-Cap Index and with other meme stocks after becoming memes. This increased interrelationship presents a risk that investors may want to pay attention to.
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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.
Photo Credit: © Getty Images / Bruce Bennett / Staff
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