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 Governance Institute (ECGI); 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 Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 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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