The consideration of Reddit is particularly relevant due to its recent significant impact on financial markets, and the controversy surrounding the behavior of Redditors in the media and in research: We then study the resulting return distribution through the lens of both modern portfolio theory and prospect theory to investigate whether following stock recommendations from Reddit would yield portfolios with desirable characteristics. We use a comprehensive data set of submissions to these subreddits and implement a simple strategy that buys recommended stocks, with the portfolio weights proportional to the number of posts. In this study, we examine whether it is reasonable to follow the recommendations on the three largest subreddits that deal with investment strategies, i.e., wallstreetbets (WSB), stocks, and investing. Recently the subreddit wallstreetbets received considerable attention due to the short squeeze of GameStop in January 2021 and triggered a discussion about whether Reddit posts are only memes or contain valuable information. Social media platforms, such as Reddit, offer a place to share and discuss ideas about investment strategies. We find that the CPT-valuations of the Reddit portfolio exceed those of the market, which may explain the persistent attractiveness for investors to follow social media stock recommendations despite the unfavorable risk-return ratio. Therefore, we draw on cumulative prospect theory (CPT). However, it is likely that Reddit users, especially on the subreddit wallstreetbets, have preferences for bets which are not captured by the mean–variance framework. This is consistent with the idea of “meme stocks”, meaning that the recommended stocks are artificially inflated in the short term when they are recommended, and that the posts contain no information about long-term success. Furthermore, the strategy leads to positive (insignificant) short-term and negative (significant) long-term alphas when considering common risk factors. A simple strategy that buys recommended stocks weighted by the number of posts per day yields a portfolio with higher average returns at the expense of higher risks than the market for all holding periods, i.e., unfavorable Sharpe ratios. ![]() This study investigates stock recommendations from the three largest finance subreddits on Reddit: wallstreetbets, investing and stocks.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |