Did David win a battle or the war against Goliath? Dynamic return and volatility connectedness between the GameStop stock and the high short interest indices

• Published in: Research in international business and finance 2023-01, Vol.64, p.101803, Article 101803
• Main Authors: Aharon, David Y., Kizys, Renatas, Umar, Zaghum, Zaremba, Adam
• Format: Article
• Language: English
• Subjects: Economics and Finance; GameStop; Humanities and Social Sciences; Return volatility; Short-interest index; Spillovers; Static and dynamic connectedness; Stock returns; WallStreetBets
• ISSN: 0275-5319; 1878-3384
• DOI: 10.1016/j.ribaf.2022.101803

Can a short-squeeze incident trigger financial contagion over heavily shorted companies? The recent GameStop frenzy provides a unique natural experiment to explore this question. This study examines the static and dynamic return and volatility connectedness among the GameStop stock, the novel market-wide and sectoral short-interest indices, and the U.S. stock market. Contrary to anecdotal evidence, we find that the GameStop stock is not a net transmitter but a net recipient of return and volatility spillovers from other companies shorted in the market. This result agrees with the view that short-interest indices provide price discovery for shorted stocks. Therefore, although David might have won a battle against Goliath, he does not seem to win the war. [Display omitted] •We explore if the recent GameStop frenzy triggered rises in contagion.•We examine if short-interest indices provide price discovery for short-traded stocks.•We use quantile and time-varying parameter vector autoregressions.•We employ static and dynamic return and volatility connectedness.•The GameStop stock is a net recipient of return and volatility spillovers.