Studies On The Demand Elasticity Of Stocks At Chinese A-share Market

This paper studies on the IPO and share split reform lock-up expiration events at Chinese A share market. Empirically analyzes the changes in stock price and trading volume before and after the event day in a perspective of supply shocks, and finds that there exists significant supply shocks effects characterized by a drop in the stock price and an increase in trading volume. The CAAR (Cumulative Average Abnormal Return) of IPO sample yields a rate of -2.30% while the reform sample yields a -2.23%, both of which don't appear inverted in two months. Meanwhile, we find sig-nificant change in short-term mean abnormal trading volume of +126% and +220% for IPO sample and reform sample respectively, as well as in long-term mean abnor-mal trading volume of +33.2% and +39.3%.Based on the above summary statistics and considering the positive liquidity ef-fects of supply shocks, this paper establishes a CAR regression model to calculate the demand elasticity of stocks at Chinese A share market by use of IPO and share split reform data and thus gets an empirical result that the demand elasticity of stocks is finite. For the IPO sample, the demand elasticity is -52.73. For the share reform sam-ple, we get a dynamic but finite feature of the demand elasticity: low elasticity num-bers of -2.40 and -7.85 for bull market and bear market respectively but high elastici-tynumber of -227.6 for fluctuant market. The high elasticitynumber shows that A share market can absorb more new stocks at shocks.According to the hypothesis of limited demand elasticity of stocks and the ex-ternalities of supply shocks, this paper makes a further research on market return to examine whether supply shocks have a systematic impact on it, considering the fac-tual correlation between Hongkong and domestic stock markets. Therefore, a market regression model is etablished to explore the features of demand elasticity at A share maket. Our result shows that there exists a strong correlation between A share market return and proportions of unlock-up and reducing shares, where the statistic test is significant. Therefore, we can't reject the hypothesis of finite demand elasticity of market. The innovation of this paper is: we propose that supply shocks have both posi-tive and negative effects on the demand elasticity of stocks and apply it to our regres-sion model. This study provides stronger empirical evidence that supply shocks have significant effects on the demand elasticity of stocks. Based on the hypothesis of li-mited demand elasticity of stocks and the externalities of supply shocks, this paper makes a new framework for the research on market demand elasticity by using the correlation among different markets, and also make an empirical test on it.