Characteristics of Observed Demand and Supply Schedules for Individual Stocks



Using complete limit order books from the Korea Stock Exchange for a three year period including the 1998 Asian financial crisis, we observe (not estimate) demand and supply curves for individual stocks. Both curves have demonstrably finite elasticities, which fall markedly with the crisis and remain depressed long after other economic and financial variables revert to pre-crisis norms. Although they share this common long-term trend, the magnitudes of individual stocks supply and demand elasticities are negatively correlated at higher frequencies. That is, when a stocks exhibits an unusually elastic demand curve, it tends simultaneously to exhibit an unusually inelastic supply curve, and vice versa. This high frequency negative correlation also swells with the crisis. These findings have potential implications for modeling how information flows into and through stock markets, how investors react to information flows, and how new information is capitalized into stock prices. We advance speculative hypotheses, and invite further work including theory papers to explain these findings and their implications.
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Ingolf Dittmann