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Explaining Gamestop Short Squeeze using Ιntraday Data and Google Searches

This article examines the recent short squeeze that occurred in the GameStop (GME) stock in early 2021. This event, although not the only case of short squeeze, has some idiosyncrasy that makes it extremely interesting, mainly because it was organized by non-institutional investors through social media like reddit. Using intraday data, we examine whether the market was in line with the Efficient Market Hypothesis during the period from 4/1/2021 to 4/2/2021, which includes the peak of the short squeeze, or not. Moreover, using the Granger causality approach we show that: (i) volume was a leading indicator for the GME performance, and (ii) the skyrocketing performance of the GME causes the increased interest for the GME short squeeze. Finally, using a GARCH(1,1) model, we econometrically confirm that increased trading volume leads to price increases, and that when the GME story becomes very popular the returns fall. This analysis could be very useful for scholars and practitioners who examine profitable investment strategies when such conditions emerge in the markets and it also provides some thoughts for further research on the topic of “smart and dumb money” and the impact of social networks on financial markets.