Quantitative analysts Duy Pham Nguyen, Niclas Wölner-Hanssen, and Hannes Brinklert investigate texts from the social media platforms Reddit and Twitter if they could generate trading signals that result in successful trades.
On the 28th of January 2021, the value of GameStop was over 500 US dollars per share, the reason behind it was caused by people on the internet forum Reddit, “WallStreetBets”, where the users cause a short squeeze.
A short seller is an investor who borrows shares and sells them immediately, hoping to buy them back later at a lower price, and profits from the difference. Short sellers are exposed to risks such as short squeezing, which occurs when stock value rises up in price caused by e.g., news or the specific event where Reddit users drove up the price. The short seller is then forced to buy back the stock they sold, to keep the losses from staggering.
Because of the interesting event that occurred the quant team set to investigate if similar signals could be found. This was done by sentiment analysis on the text using Valence Aware Dictionary and sEntiment Reasoner (VADER), ranking the polarity of a text. Positive sentiment would indicate long and negative would indicate shorting. The universe that the sentiment was being traded was in the Technology Select Sector SPDR Fund (XLK) which is the tech sector in S&P500, and the team traded between 2016/02/19 to 2021/11/02.
To read the full report, please see attached PDF below.