Investors’ Interacting Demand and Supply Curves for Common Stocks

Complete limit order data from Korea show individual stocks’ demand and supply elasticities correlating negatively in short windows. That is, whenever a stock’s demand is unusually elastic, its supply is unusually inelastic, and vice versa. However, in long windows, individual stocks’ demand and supply elasticities correlate positively. Notably, both fall about 40% with the 1997 Asian Financial Crisis, and remain depressed long after the market and macroeconomic variables recover. A parsimonious model explains both findings with investor information heterogeneity and risk-aversion parameters, fixed in the short-run, being permanently shifted by the crisis.