Investors’ Interacting Demand and Supply Curves for Common Stocks

47 Pages Posted: 1 Jun 2016

See all articles by Martin Dierker

Martin Dierker

Korea Advanced Institute of Science and Technology (KAIST)

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: July 1, 2015

Abstract

Complete limit order data from Korea show individual stocks’ demand and supply elasticities correlating negatively in short windows. That is, whenever a stock’s demand is unusually elastic, its supply is unusually inelastic, and vice versa. However, in long windows, individual stocks’ demand and supply elasticities correlate positively. Notably, both fall about 40% with the 1997 Asian Financial Crisis, and remain depressed long after the market and macroeconomic variables recover. A parsimonious model explains both findings with investor information heterogeneity and risk-aversion parameters, fixed in the short run, being permanently shifted by the crisis.

Keywords: Demand and supply curves for individual stocks, heterogeneous private valuations, financial crisis

JEL Classification: G01, G12, G14

Suggested Citation

Dierker, Martin and Kim, Jung-Wook and Lee, Jason and Morck, Randall K., Investors’ Interacting Demand and Supply Curves for Common Stocks (July 1, 2015). Review of Finance, Forthcoming; University of Alberta School of Business Research Paper No. 2015-3,507. Available at SSRN: https://ssrn.com/abstract=2787112 or http://dx.doi.org/10.2139/ssrn.2787112

Martin Dierker

Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegi-ro
Seoul, 130-722
Korea

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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