Zihan Lin (ICME): Prices are Less Elastic for Less Diversifiable Demand

Zihan Lin: Prices are Less Elastic for Less Diversifiable Demand

Paper link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4038664

Abstract: We hypothesize and provide evidence that prices are more inelastic when demand is less diversifiable. Specifically, we decompose order-flow imbalance into several components with varying degrees of diversifiability and estimate their price impacts. The results reveal a continuum of price elasticities ranging from high elasticities at style/factor levels to low elasticities at idiosyncratic levels. Our findings are consistent with weaker liquidity provision at less diversifiable levels—which may arise from investor risk aversion or portfolio constraints—and inconsistent with information-based price-impact mechanisms. Our findings might explain why “discount rate variation” matters to a greater extent as the level of aggregation rises.

Bio: Zihan is a final year Ph.D. student at Stanford ICME advised by Markus Pelger. His research interests are in institutional finance, machine learning, and asset pricing.

Personal website: https://sites.google.com/view/zihanlin/home