Download This PaperImpact of Demand Shocks on the Stock Market: Evidence from Chinese IPOs
81 Pages Posted: 29 Dec 2020 Last revised: 1 Feb 2024
Date Written: December 16, 2021
Abstract
We exploit demand shocks created as investor funds are frozen and unfrozen during Chinese
IPOs to estimate their impact on the aggregate 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 flows have large price impacts, with a 10 bps demand shock increasing
the aggregate market level by approximately 40 bps. Our estimates are inconsistent with most
rational and behavioral models, but consistent with the recent inelastic markets hypothesis.
Keywords: Inelastic markets hypothesis, demand shocks, price elasticity of demand, Chinese stock market, initial public offering
JEL Classification: G11, G12, G18, G24
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