Characteristics of Observed Limit Order Demand and Supply Schedules for Individual Stocks

43 Pages Posted: 21 Feb 2009 Last revised: 27 Jan 2013

See all articles by Jung-Wook Kim

Jung-Wook Kim

Seoul National University - Graduate School of Business

Jason Lee

University of Alberta

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Date Written: February 2009

Abstract

Using complete order books from the Korea Stock Exchange for a four-year period including the 1997 Asian financial crisis, we observe (not estimate) limit order demand and supply curves for individual stocks. Both curves have demonstrably finite elasticities. These fall markedly, by about 40%, with the crisis and remain depressed long after other economic and financial variables revert to pre-crisis norms. Superimposed upon this common long-term modulation, individual stocks' supply and demand elasticities correlate negatively at high frequencies. That is, when a stock exhibits an unusually elastic demand curve, it tends simultaneously to exhibit an unusually inelastic supply curve, and vice versa. These findings have potential implications for modeling how information flows into and through stock markets, how limit order providers react or interact to information flows, how new information is capitalized into stock prices, and how financial crises alter these processes. We advance speculative hypotheses, and invite further theoretical and empirical work to explain these findings and their implications.

Suggested Citation

Kim, Jung-Wook and Lee, Jason and Morck, Randall K., Characteristics of Observed Limit Order Demand and Supply Schedules for Individual Stocks (February 2009). NBER Working Paper No. w14733. Available at SSRN: https://ssrn.com/abstract=1347216

Jung-Wook Kim

Seoul National University - Graduate School of Business ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Jason Lee

University of Alberta ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-4839 (Phone)
780-492-3325 (Fax)

Randall K. Morck (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-5683 (Phone)
780-492-3325 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governence Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Asian Bureau of Finance and Economic Research ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

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