Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/309810 
Year of Publication: 
2023
Citation: 
[Journal:] Digital Finance [ISSN:] 2524-6186 [Volume:] 5 [Issue:] 2 [Publisher:] Springer International Publishing [Place:] Cham [Year:] 2023 [Pages:] 421-448
Publisher: 
Springer International Publishing, Cham
Abstract: 
This study investigates stock recommendations from the three largest finance subreddits on Reddit: wallstreetbets, investing and stocks. 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. Furthermore, the strategy leads to positive (insignificant) short-term and negative (significant) long-term alphas when considering common risk factors. 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. 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. Therefore, we draw on cumulative prospect theory (CPT). 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.
Subjects: 
Behavioral finance
Prospect theory
Reddit
Social media
Stock return
JEL: 
G11
G12
G14
G41
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

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