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Does the short squeeze lead to market abnormality and antileverage effect? Evidence from the Gamestop case

Does the short squeeze lead to market abnormality and antileverage effect? Evidence from the... This study examines the Gamestop (GME) short squeeze in early 2021. Using intraday data for the period 4/1/2021–5/2/2021, the author provides empirical evidence that the GME stock price exhibited abnormal behavior.Design/methodology/approachThe author uses the popular Runs test to show that the GME returns were not randomly distributed, which is an indication of a violation of the Efficient Market Hypothesis (EMH). The main objective of the paper is to provide new quantitative evidence that stock returns are abnormal when short squeeze conditions emerge. The author employs the asymmetry Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) models (the Exponential GARCH (EGARCH) and the Threshold GARCH (TGARCH)) and provides evidence that an exceptional time series feature emerged during the examined period: the antileverage effect.FindingsThe results show that the GME returns were not randomly distributed during the examined period and the asymmetry GARCH models indicate that, in contrast to what the time series normally show, volatility increased when the GME prices increased.Research limitations/implicationsThis paper presents a new/alternative approach for the study of EMH and abnormal returns in financial markets. Further studies on market performance during similar short squeeze conditions should be carried out in order to obtain empirical evidence for the antileverage effect abnormality.Practical implicationsThis paper could be useful for scholars who examine the EMH in financial markets because it suggests an additional method for testing abnormalities. It also presents a useful tool that allows practitioners to monitor for indications of abnormality in the stock market during a short squeeze, since the emergence of the antileverage abnormality could function as such an indication. Additionally, the outcome of this analysis could be useful for regulators because coordination among investors is easier than ever in the Internet era and such events may happen again in the future; even under normal (not short squeeze) conditions and lead to market instability.Originality/valueThis research differs from other studies that examine the GME case because it presents a new way to quantitatively present the abnormal performance of the stock markets for reasons that could be linked with the emergence of short squeeze conditions. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Studies Emerald Publishing

Does the short squeeze lead to market abnormality and antileverage effect? Evidence from the Gamestop case

Journal of Economic Studies , Volume 49 (8): 14 – Oct 18, 2022

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References (39)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0144-3585
DOI
10.1108/jes-04-2021-0210
Publisher site
See Article on Publisher Site

Abstract

This study examines the Gamestop (GME) short squeeze in early 2021. Using intraday data for the period 4/1/2021–5/2/2021, the author provides empirical evidence that the GME stock price exhibited abnormal behavior.Design/methodology/approachThe author uses the popular Runs test to show that the GME returns were not randomly distributed, which is an indication of a violation of the Efficient Market Hypothesis (EMH). The main objective of the paper is to provide new quantitative evidence that stock returns are abnormal when short squeeze conditions emerge. The author employs the asymmetry Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) models (the Exponential GARCH (EGARCH) and the Threshold GARCH (TGARCH)) and provides evidence that an exceptional time series feature emerged during the examined period: the antileverage effect.FindingsThe results show that the GME returns were not randomly distributed during the examined period and the asymmetry GARCH models indicate that, in contrast to what the time series normally show, volatility increased when the GME prices increased.Research limitations/implicationsThis paper presents a new/alternative approach for the study of EMH and abnormal returns in financial markets. Further studies on market performance during similar short squeeze conditions should be carried out in order to obtain empirical evidence for the antileverage effect abnormality.Practical implicationsThis paper could be useful for scholars who examine the EMH in financial markets because it suggests an additional method for testing abnormalities. It also presents a useful tool that allows practitioners to monitor for indications of abnormality in the stock market during a short squeeze, since the emergence of the antileverage abnormality could function as such an indication. Additionally, the outcome of this analysis could be useful for regulators because coordination among investors is easier than ever in the Internet era and such events may happen again in the future; even under normal (not short squeeze) conditions and lead to market instability.Originality/valueThis research differs from other studies that examine the GME case because it presents a new way to quantitatively present the abnormal performance of the stock markets for reasons that could be linked with the emergence of short squeeze conditions.

Journal

Journal of Economic StudiesEmerald Publishing

Published: Oct 18, 2022

Keywords: Short squeeze; Antileverage effect; Efficient market hypothesis; Runs test

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