Does the Short Squeeze Lead to Market Abnormality and Anti-leverage Effect? Evidence From the GameStop Case

This study examines the GME short squeeze in early 2021. Using intraday data from the period 4/1/2021 - 5/2/2021, we show that the GME stock price exhibited abnormal behavior. The Runs-test confirms that the GME returns were not randomly distributed, which is an indication of a violation of the Efficient Market Hypothesis (EMH). Moreover, we employ the asymmetry EGARCH(1,1,1) model and we provide evidence that an exceptional time series feature emerged during the examined period: the anti-leverage effect. In contrast to what the time series normally show, volatility increased when the GME prices increase. The combination of the short squeeze and the investors’ coordination may be the appropriate conditions for the anti-leverage effect to emerge, which may be a new way to econometrically show violation of the EMH. The outcome of this analysis is useful for scholars and 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 conditions (not during a short squeeze) this could lead to market instability.