Characteristics of Observed Limit Order Demand and Supply Schedules for Individual Stocks

Jung-Wook Kim, Jason Lee and Randall Morck

No 14733, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using complete order books from the Korea Stock Exchange for a four-year period including the 1997 Asian financial crisis, we observe (not estimate) limit order demand and supply curves for individual stocks. Both curves have demonstrably finite elasticities. These fall markedly, by about 40%, with the crisis and remain depressed long after other economic and financial variables revert to pre-crisis norms. Superimposed upon this common long-term modulation, individual stocks' supply and demand elasticities correlate negatively at high frequencies. That is, when a stock exhibits an unusually elastic demand curve, it tends simultaneously to exhibit an unusually inelastic supply curve, and vice versa. These findings have potential implications for modeling how information flows into and through stock markets, how limit order providers react or interact to information flows, how new information is capitalized into stock prices, and how financial crises alter these processes. We advance speculative hypotheses, and invite further theoretical and empirical work to explain these findings and their implications.

JEL-codes: G01 G10 G14 (search for similar items in EconPapers)
Date: 2009-02
New Economics Papers: this item is included in nep-mst and nep-sea
Note: CF
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