The Inelastic Market Hypothesis: A Microstructural Interpretation

We attempt to reconcile Gabaix and Koijen's (GK) recent Inelastic Market Hypothesis with the order-driven view of markets that emerged within microstructure literature in past 20 years. review most salient empirical facts arguments give credence idea market price fluctuations are mostly due order flow, whether informed or non-informed. show Latent Liquidity Theory impact makes a precise prediction for GK's multiplier M, which measures by how many dollars, on average, value company goes up if one buys dollar worth its stocks. Our central result is M increases volatility stock decreases fraction cap. traded daily. discuss several results suggesting lion's share trading activity.