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Estimating the price elasticity of demand in the London stock market

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Author Info
Eric J. Levin
Robert E. Wright

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Abstract

The hypothesis that demand curves for individual stocks slope downwards is typically investigated by empirical analysis of stock price movements following events that cause shifts in demand or supply. However, it is difficult to attribute observed price move ments between downward sloping demand curves and information conveyed by the event. In this paper an econometric approach, based on market-maker response to unexpected changes in inventory, is used to separate out the slope of the demand curve from information effects and estimate the slopes of the demand curves for twenty stocks included in the Financial Times-Stock Exchange 100 Share Index (FTSE100) . The analysis suggests that downward sloping demand curves would decrease the price by about 7.5% for a 1% increase in the number of outstanding shares.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal The European Journal of Finance.

Volume (Year): 8 (2002)
Issue (Month): 2 (June)
Pages: 222-237
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Handle: RePEc:taf:eurjfi:v:8:y:2002:i:2:p:222-237

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Related research
Keywords: Demand; Stocks; Market;

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References listed on IDEAS
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  1. Madhavan, Ananth & Smidt, Seymour, 1991. "A Bayesian model of intraday specialist pricing," Journal of Financial Economics, Elsevier, vol. 30(1), pages 99-134, November. [Downloadable!] (restricted)
    Other versions:
  2. Lynch, Anthony W & Mendenhall, Richard R, 1997. "New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index," Journal of Business, University of Chicago Press, vol. 70(3), pages 351-83, July. [Downloadable!] (restricted)
  3. Dhillon, Upinder & Johnson, Herb, 1991. "Changes in the Standard and Poor's 500 List," Journal of Business, University of Chicago Press, vol. 64(1), pages 75-85, January. [Downloadable!] (restricted)
  4. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December. [Downloadable!] (restricted)
  5. Varian, Hal R, 1985. " Divergence of Opinion in Complete Markets: A Note," Journal of Finance, American Finance Association, vol. 40(1), pages 309-17, March. [Downloadable!] (restricted)
  6. Loderer, Claudio & Cooney, John W & van Drunen, Leonard D, 1991. " The Price Elasticity of Demand for Common Stock," Journal of Finance, American Finance Association, vol. 46(2), pages 621-51, June. [Downloadable!] (restricted)
  7. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May. [Downloadable!] (restricted)
  8. Masulis, Ronald W. & Korwar, Ashok N., 1986. "Seasoned equity offerings : An empirical investigation," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 91-118. [Downloadable!] (restricted)
  9. Shleifer, Andrei, 1986. " Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-90, July. [Downloadable!] (restricted)
  10. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June. [Downloadable!] (restricted)
  11. Amihud, Yakov & Mendelson, Haim, 1980. "Dealership market : Market-making with inventory," Journal of Financial Economics, Elsevier, vol. 8(1), pages 31-53, March. [Downloadable!] (restricted)
  12. Abagail McWilliams & Donald S. Siegel & Patrick M. Wright, 2006. "Corporate Social Responsibility: International Perspectives," Rensselaer Working Papers in Economics 0604, Rensselaer Polytechnic Institute, Department of Economics. [Downloadable!]
  13. Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July. [Downloadable!] (restricted)
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  14. Godfrey, Leslie G, 1978. "Testing for Higher Order Serial Correlation in Regression Equations When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1303-10, November. [Downloadable!] (restricted)
  15. Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1293-1301, November. [Downloadable!] (restricted)
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