A supply-demand model for IPO pricing and initial returns in primary market

This paper classed the investors in the primary market to arbitragers and noise traders, then analyzed the return of the investors from the primary market under the system of cash rationing in China. The results suggest that the arbitragers can work with changing their demand, but the effect of the arbitragers is limited by the demand of the noise traders. When the noise demand is less than the issue volume, the quantity arbitrage is perfect and the offering price is underpriced, but the investors can just earn the normal return and the rule of restricted price has no effect. When the noise demand is more than the issue volume, the quantity arbitrage is limited and the offering price may be overpriced, and the investors will get a negative abnormal return if the offering price is lower than the given value which is lower than the intrinsic value.