Demand Curves for European Stocks Slope Down Too
Review of Finance, Vol. 7, No. 3, pp. 437-457, 2003
Posted: 3 Apr 2008
The 2000 implementation of float-capitalization index weights in the Dow Jones STOXXSM indices changed the demand for large European stocks. In this paper, we test for imperfect-substitution and price-pressure effects due to the change in the demand for stocks. Our results show that we cannot reject complete reversal after eight weeks of abnormal trading volume for companies with both decreased or increased index weights. This result is consistent with the existence of downward sloping demand curves for stocks. Contrary to the fundamental assumption of perfectly elastic demand curves in asset pricing theories, our findings suggest that a price pressure effect is not a plausible explanation.
Keywords: Downward sloping demand curves, Float capitalization, Imperfect substitution, Index weights, Liquidity effects, Price pressure
JEL Classification: G11, G14
Suggested Citation: Suggested Citation