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Heterogeneous Investors and their Changing Demand and Supply Schedules for Individual Common Stocks

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  • Jung-Wook Kim
  • Jason Lee
  • Randall K. Morck

Abstract

Using 550 million limit orders submitted in the Korea Stock Exchange, we estimate demand and supply elasticities of heterogeneous investor types and their changes around the Asian financial crisis. We find that domestic individuals have substantially more inelastic demand and supply curves than domestic institutions and foreign investors. The crisis permanently reduced price elasticities of domestic individuals by 50% but had no effect on those of foreign investors. Institutional changes restricting margin purchases, implemented after the crisis, seem particularly important in explaining the dramatic drop. Information heterogeneity, availability of close substitutes and arbitrage risk also explain time-series variations in elasticities.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10410.

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Date of creation: Apr 2004
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Handle: RePEc:nbr:nberwo:10410

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  1. Randolph B. Cohen & Paul A. Gompers & Tuomo Vuolteenaho, 2002. "Who Underreacts to Cash-Flow News? Evidence from Trading between Individuals and Institutions," NBER Working Papers 8793, National Bureau of Economic Research, Inc.
  2. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(1), pages 73-92, February.
  3. Baker, Malcolm & Savasoglu, Serkan, 2002. "Limited arbitrage in mergers and acquisitions," Journal of Financial Economics, Elsevier, Elsevier, vol. 64(1), pages 91-115, April.
  4. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, American Finance Association, vol. 40(3), pages 793-805, July.
  5. Baker, Malcolm & Stein, Jeremy C., 2004. "Market liquidity as a sentiment indicator," Journal of Financial Markets, Elsevier, Elsevier, vol. 7(3), pages 271-299, June.
  6. Copeland, Thomas E & Galai, Dan, 1983. " Information Effects on the Bid-Ask Spread," Journal of Finance, American Finance Association, American Finance Association, vol. 38(5), pages 1457-69, December.
  7. Bagwell, Laurie Simon, 1992. " Dutch Auction Repurchases: An Analysis of Shareholder Heterogeneity," Journal of Finance, American Finance Association, American Finance Association, vol. 47(1), pages 71-105, March.
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Cited by:
  1. Naes, Randi & Skjeltorp, Johannes A., 2006. "Order book characteristics and the volume-volatility relation: Empirical evidence from a limit order market," Journal of Financial Markets, Elsevier, Elsevier, vol. 9(4), pages 408-432, November.

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