ESSA

ESSA

Stock market Psy-chology


Pat Healy

By

April 19th, 2015


Pat Healy takes a look at the unexpected effect the popularity of Psy had on the stock market.


When I first saw the video of the song ‘Gangnam style’ By Korean k-pop star Psy, I couldn’t help but to be charmed by its delightful wackiness. After watching it a few more times, I  was compelled to cross my hands and give that corny dance move a try. I was not the only one swept up in the hysteria. Along with a couple of billion viewers the stock market also danced to Psy’s tune.

The notorious and beloved by some, ‘Gangnam Style’ – released in July 2012 – caused DI Corp (Psy’s father’s company) to rise nearly 800% in value in October of the same year (as seen in Figure 1). But, this was short-lived, and quickly the price plummeted close to its original value. Then when Psy released his second single Gentleman on April 15 2013 the share price again peaked at around 800% this time maintaining its inflated value.

Figure 1. Five year stock price of DI Corp. Between 2010 and 2015 Yahoo Finance

 

With an absence of relevant business information to explain the rapid price change, Psy going viral may have led DI Corp to float – albeit temporarily – in a stock bubble. But this does not make much sense: efficient market theories explain that stock bubbles do not exist. So what is going on here?

To help answer this question we should look at Eugene Fama’s efficient capital market hypothesis.  Fama, an American economist, won the Nobel Prize in economics in 2013. The hypothesis states that an efficient market has a large number of competing profit maximisers trying to predict values of future markets where the current important information is mostly available to all participants. Because this information is freely available actual stock prices are good indicator of their true value. Companies will bid the price up and down to reflect this value. This is, Fama concludes, why stock bubbles don’t exist.

This hypothesis can help to explain what may be happening to the stock price of DI Corp. When the stock price rose for the second time with the release of the second single ‘Gentleman’ investors this time had more information available to them. Hence, it is rational for investors to expect a higher value of DI Corp and thus bid up the price. This is emulated by the biggest investor in DI Corp, who uses Famas’ hypothesis to make their investment decisions.

However the initial rise in stock price with the release of ‘Gangnam Style’ and the quick drop back down in price is not easily explained. Perhaps it was a stock bubble and occurred due to an overreaction by investors. It may also be the case that the change in stock price was a result of bounded rationality. Investors with limited information and limited time may have bid the value of the stock up in expectation of others making the very same decision. And the sharp drop in price may have been caused by companies bidding the stock price back down to reflect its true value. Because both occurrences are a possibility it is unfortunately not possible to say whether Psy did cause a stock bubble or not.

But perhaps even the invisible hand can get caught up in Psy hysteria. For instance, take a look the company Panorama Synergy LTD listed on the stock exchange as PSY. The value of the stock price mysteriously increased by 4000% in July 2014 as shown in figure 2. Perhaps there is some Gangnam style of economics which allows for stock bubbles.

Figure 2. Two year stock price of Panorama Synergy LTD. Between 2013 and 2015 Yahoo Finance

 

Whatever the reason for these unusual occurrences, one thing is for sure. just like myself, the stock market can’t help but bounce up and down to Psy’s songs.

Read more

If you liked this, check out Bori Ahn’s article on Psy’s impact on the K-pop industry.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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