Rational Expectations and the Measurement of a Stock's Elasticity of Demand

Authors

  • FRANKLIN ALLEN,

  • ANDREW POSTLEWAITE

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    • Assistant Professor and Professor, respectively, University of Pennsylvania. We are grateful to an anonymous referee for helpful comments.

ABSTRACT

Scholes [1] considered the effect of secondary sales of large blocks of stock on the price of the stock. However, he only looked at price changes occurring just before and just after the sale took place. It is argued here, using a simple model, that if traders have rational expectations they may anticipate the sale, and prices could reflect this possibility long before it actually occurs. To determine the full effect, it may therefore be necessary to consider the price path many months, or even years, before the sale.

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