n Investment Analysts Journal - The supply and demand effect of block transactions on share prices

Volume 1996, Issue 43
  • ISSN : 1029-3523
  • E-ISSN: 2077-0227
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The effect of supply and demand on the pricing of shares was investigated by analysing block transactions on the JSE. A sample of 291 block transactions was selected from the period 1 June 1993 to 1 June 1994 from the Financial and Industrial sectors and analysed using an event time methodology. The study compares the reaction of share prices of large block transactions with the expected price, as predicted using the market model. The analysis period covered twenty days before and twenty days after the block transaction. <br>The data was subdivided into buyer induced trades and seller induced trades, the distinction being made on the sign of the market model residual (positive - buyer induced trade, negative - seller induced trade). The results show that there is a statistically significant increase/ decrease in the share price for buyer/seller induced trades. A relationship between the size of the block trade and the absolute value of the price change was also found. Price reversals immediately after both buyer and seller induced trades were noted. <br>Support was found for the price pressure hypothesis and the information hypothesis; no support for the substitution hypothesis was found. The results also support the weak and semi-strong forms of the Efficient Markets Hypothesis. Evidence was found to indicate that share prices are affected by supply and demand.

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