Impact of Demand Shocks on the Stock Market: Evidence from Chinese IPOs

53 Pages Posted: 29 Dec 2020 Last revised: 20 Dec 2021

See all articles by Jennifer (Jie) LI

Jennifer (Jie) LI

INSEAD; Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance

Qi Zhang

Shanghai Jiao Tong University (SJTU)

Date Written: December 16, 2021

Abstract

The inelastic markets hypothesis states that the aggregate stock market price elasticity of demand is small, implying that flows have large impacts on prices. We exploit demand shocks created as investor funds are frozen and unfrozen during Chinese IPOs to estimate the impact of demand shocks on the Chinese stock market. Using brokerage account records, we observe the selling and buying as investors raise cash to subscribe for IPOs and then reinvest the funds that supported unsuccessful subscriptions. Using an instrumental variables estimator, a 10 bps demand shock increases the aggregate stock market level by between 30 and 48 bps.

Keywords: Inelastic markets hypothesis, demand shocks, Chinese stock market, initial public offering

JEL Classification: G11, G12, G18, G24

Suggested Citation

LI, Jennifer (Jie) and Pearson, Neil D. and Zhang, Qi, Impact of Demand Shocks on the Stock Market: Evidence from Chinese IPOs (December 16, 2021). Available at SSRN: https://ssrn.com/abstract=3731219 or http://dx.doi.org/10.2139/ssrn.3731219

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)

Qi Zhang

Shanghai Jiao Tong University (SJTU) ( email )

China

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