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

51 Pages Posted: 29 Dec 2020

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; Canadian Derivatives Institute

Qi Zhang

Durham University

Date Written: November 15, 2020

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 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

Suggested Citation

LI, Jennifer (Jie) and Pearson, Neil D. and Zhang, Qi, Impact of Demand Shocks on the Stock Market: Evidence from Chinese IPOs (November 15, 2020). 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)

Canadian Derivatives Institute ( email )

3000, chemin de la Côte-Sainte-Catherine
Montréal, Québec H3T 2A7
Canada

Qi Zhang

Durham University ( email )

Old Elvet
Mill Hill Lane
Durham, Durham DH1 3HP
United Kingdom

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