Impact of Demand Shocks on the Stock Market: Evidence from Chinese IPOs
51 Pages Posted: 29 Dec 2020
Date Written: November 15, 2020
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 we find that a 10 bps demand shock increases stock prices by between 26.1 and 64.7 bps.
Keywords: Inelastic markets hypothesis, demand shocks, Chinese stock market, initial public offering
JEL Classification: G11, G12, G18, G24
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