The Information Content of the Demand and Supply Schedules of Stocks

We wish to thank the Tel Aviv Stock Exchange for providing us the data. We thank Yakov Amihud, Eugene Kandel and Orly Sade for very useful comments and suggestions. Wohl thanks the David Orgler and Family Research Fund for Banking and Finance for partial financial support. 2 Abstract In this first direct test of Hellwig's (1980) Noisy Rational Expectations Equilibrium (NREE), we restate the model and derive the following two empirical implications: 1) A demand curve that is steeper (less elastic) than the supply curve is associated with more liquidity buys than sells and a higher price. Hence, a steeper demand (supply) predicts negative (positive) future returns. 2) The supply curve is concave and the demand curve is convex. We use a unique database containing all the orders submitted during the opening sessions at the TASE to test these implications, documenting evidence consistent with these predictions. Our findings have implications for the theory of NREE models and for the design of trading mechanisms.