Why GameStop? Why now? A theory of all in investors and unstable asset prices

Presented on Wednesday, April 14, 2021 by Professors Edward Van Wesep and Brian Waters

Description:
The rapid rise in the price of GameStop shares in early 2021 was, to many, a surprise. How could disparate small investors muster the capital to force share prices up 20-fold? To answer this question, we develop a theory of retail investor trading behavior that causes asset prices to be unstable when investors are allowed to buy shares with borrowed funds or purchase highly risky options. We define an investor to be all in if she borrows as much as possible and continues to borrow more when prices rise. We show that when enough investors are all in, demand for shares can be upward sloping. That is, investors buy more shares when the price is higher. When demand is upward sloping, prices are unstable and can quickly ratchet to sky-high levels.

Presenters Bios:

Van Wesep is an associate professor of finance. He earned a bachelor’s degree in applied mathematics from Brown University in 2003 and a doctorate in economics from Stanford University in 2007. His research spans several areas of economics, including asset pricing, contract design, employee compensation, and microeconomic theory. He teaches graduate-level economics courses in the Leeds MBA, evening MBA, masters in finance, and masters in real estate programs.

Waters is an assistant professor of finance. He teaches investment and portfolio management at the undergraduate level and teaches a graduate-level course in financial theory. He earned a doctorate in finance from the UCLA Anderson School of Management and bachelor’s degrees in economics and in human and organizational development from Vanderbilt University. His research interests include corporate finance and microeconomic theory with a focus on the design of incentive and screening contracts.

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