Do Demand Curves for Stocks Slope Down? Evidence from an Exogenous Demand Shock

The Mutual Market Access scheme in 2014 triggered an influx of capital from mainland China to Hong Kong. We argue that it is exogenous demand shock for the Hong Kong stocks market and thus provides a unique opportunity to test whether the demand curves for stocks are downward sloping. We find a positive relationship between abnormal returns and demand shocks, implying downward-sloping demand curves for stocks in short-run. Over time the demand flattens, and the positive relationship disappears in about 40 days. We only find weak evidence that limited attention and arbitrage risk are related to the elasticity.