Empirical Study of Price Pressure Hypothesis-A Case Study of ETF of IPO in Taiwan
Date Issued
2010
Date
2010
Author(s)
Cho, Cheng-I
Abstract
The purpose of this study is to examine whether the Taiwan stock market supports the price pressure hypothesis. According to the content of price pressure hypothesis, large amounts of cash flow will result in short-term rise in stock prices, this is because the market can’t absorb the large amount of excess short-term demand, but in the long-term when the market can digest the large excess demand, price will revert to the original normal level. Related literatures to explore such issues most use the event of additions and deletions from stock index to observe whether there are abnormal stock returns. Index includes stocks, however, often carries the information, we can’t say the price effect we observed is due to the price pressure effect or information effect. This paper tries to provide a solution, that is, the event of ETF issues by initial public offering (IPO). We use the event to test the price pressure effect during the period of ETF mimics the index. We have three main empirical results. First, the Taiwan stock market does not meet the efficiency of the market. Second, the Taiwan stock price reaction is consistent with price pressure hypothesis. Third, we finally find the smaller size of the company, the greater price response for excess demand. We also find that liquidity effects do exist, the higher the stock liquidity will lower transaction costs thus raising the stock assessment.
Subjects
price pressure hypothesis
Taiwan top 50 tracker fund
event study
Type
thesis
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