Trading on Emotions: The Dual regimes of Meme Stocks Driven by Social Media Sentiment

GameStop serves as a striking example of a recent abnormal market phenomenon, where the collective actions of social media users, particularly in the WallStreetBets community on Reddit, have exerted a significant influence on stock prices, leading to phenomenon of "Meme Stocks." This paper introduces the Emotion Regime Switching-VAR methodology to explore the extent to which sentiment from WallStreetBets affects GameStop's price movements. The results reveal that while social media sentiment significantly impacts the market, this influence is not uniform. The market alternates between rational and emotional states, with social media acting as a catalyst behind these shifts. Notably, during emotional states, the market displays heightened volatility and a more substantial effect of sentiment in driving stock prices.