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The Market Demand Curve for Common Stocks: Evidence from Equity Mutual Fund Flows

Published online by Cambridge University Press:  06 April 2009

Heung-Joo Cha  and
Bong-Soo Lee
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Abstract

We examine whether the market demand curve for equities is dawnward sloping. Unlike previous studies that examine individual stocks' demand curves, we look at the aggregate demand curve. As a proxy for aggregate demand, we employ equity mutual fund flows. Unlike previous studies that focus on events that are unlikely to convey new information to the market, we devise an empirical framework that disentangles the price-pressure effect and the information effect. We do not find evidence for the price-pressure effect that equity fund flows directly affect stock market prices in the presence of fundamentals of firms. Instead, we find that equity fund flows seem to be influenced by the performance of the stock market and that investors try to forecast fundamentals of firms and change their demand for stocks accordingly. Overall, these findings are with a horizontal market demand curve for equities.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 36 , Issue 2 , June 2001 , pp. 195 - 220
Copyright
Copyright © School of Business Administration, University of Washington 2001

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Footnotes

*

Both authors, Department of Finance College of Business Administration University of Houston, Houston, TX 77204. We have benefited from discussions and comments from Gwangheon Hong, Praveen Kumar, Rich Pettit, Sudipto Sarkar, Ron Singer, Sorin Sorescu, and participants at the Finance Department seminar, University of Houston. We thank William Goetzmann (associate editor and referee) for helpful comments.

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