What are the lessons learned from the GameStock saga?
What is the GameStop saga: On Monday, January 11 the stock price of GameStock was near $20 but, from Thursday January 21, to Friday, January 29, GameStop traded in a range from $37 to $483! This appreciation was driven by users of Reddit’s r/wallstreetbets forum and inflicted huge losses on institutional investors who were shorting GameStock shares.
Cecchetti and Schoenholtz argue that there are three lessons to learn from this event:
- The first is about how narratives and the limits to arbitrage can lead to unsustainable asset price booms;
- Second, short sellers are important for the efficiency of asset pricing and the allocation of capital. Moreover, with the ongoing rise of passive index investing, their potential role in keeping the U.S. equity market efficient will become more, not less, salient;
- Third, to keep the financial system safe and resilient, it is essential that clearing firms maintain sufficiently stringent margin and collateral requirements even if, on occasion, it limits a broker’s ability to implement trades for its clients.
GameStop: Some Preliminary Lessons
By: Stephen G. Cecchetti, Kermit L. Schoenholtz – Brandeis University, New York University
