Skip to main content Accessibility help
×
×
Home

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

  • Heung-Joo Cha and Bong-Soo Lee

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.

Copyright

References

Hide All
Akaike, H.A New Look at the Statistical Identification Model.” IEEE Transactions on Automatic Control, 19 (1974), 716723.
Campbell, J. Y.A Variance Decomposition for Stock Returns.” Economic Journal, 101 (1991) 157179.
Campbell, J. Y. and Shiller, R. J.. “The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors.” Review of Financial Studies, 1 (1989), 195228.
Cohen, R.Asset Allocation Decisions of Individuals and Institutions.” Working Paper, Harvard Univ. (1999).
Dann, L.; Mayers, D.; and Raab, R. Jr, “Trading Rules, Large Blocks and the Speed of Price Adjustment.” journal of Financial Economics, 4 (1977), 322.
Davidson, W., III; Chhachhi, I.; and Glascock, J.. “A Test for Price Pressure Effects in Tender Offer Stock Repurchases.” Financial Review, 31 (1996), 2549.
Dhillon, U., and Johnson, H.. “Changes in the Standard and standard and Poor's 500 List.” Journal of Business, 64 (1991), 7585.
Dickey, D. and Fuller, W.. “Distribution of the Estimators for Autoregressive Time Series with a Unit Root.” Journal of the American Statistical Association, 74 (1979), 427431.
Edelen, R. and Warner, J.. “Aggregate Price Effect of Institutional Trading: A Study of Mutual Fund Flow and Market Returns.” Working Paper, Univ. of Pennsylvania (1999).
Edwards, F., and Zhang, X.. “Mutual Funds and Stock and Bond Market Stability.” Journal of Financial Services Research, 13 (1998), 257282.
Engle, R., and Granger, W.. “Cointegration and Error Correction: Representation, Estimation and Testing. Econometrica, 55 (1987), 251276.
Engle, R. and Yoo, B.. “Forecasting and Testing in Cointegrated Systems.” Journal of Econometrics, 35 (1987), 173–159.
Fama, E. F.Stock Returns, Expected Returns, and Real Acivity.” Journal of Finance, 45 (1990), 10891109.
Fama, E., and French, K.. “Business Conditions and Expected Returns on Stocks and Bonds.” Journal of Financial Economics, 25 (1989), 2349.
Fortune, P. “Mutual Funds, Part II: Fund Flows and Security Returns.” New England Economic Review (01 –Feb. 1998), 322.
Goetzmann, W., and Jorion, P.. “Testing the Predictive Power of Dividend Yields.” Journal of Finance, 47 (1993), 663679.
Goetzmann, W., Massa, M.. “Index Funds Investors and Stock Market Growth. Working Paper, Yale Univ. (1998).
Goetzmann, W.; Massa, M.; and Rouwenhorst, K.. “Behavioral Factors in Mutual Fund Flows. Working Paper, Yale Univ. (2000).
Granger, C. W.Some Recent Developments in a Concept of Causality.” Journal of Econometrics. 39 (1988), 199211.
Harris, L., and Gurel, E.. “Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence Price Pressure.” Journal of Finance 41 (1986), 815829.
Hess, A. and Frost, P.. “Tests for Price Effects of New Issues of Seasoned Securities.” Journal of Finance, 36 (1982), 1125.
Hodrick, R. J.Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement.” Review of Financial Studies, 5 (1992), 357386.
Jain, P. C.The Effect on Stock Price of Inclusion in or Exclusion from the S&P 500.” Financial Analysts Journal, 43 (1987), 5865.
Kalay, A., and Shimrat, A.. “Firm Value and Seasoned Equity Issues: Price Pressure, Wealth Redistribution, or Negative Information.” Journal of Financial Economics, 19 (1987), 109126.
Kandel, S.; Sarig, O.; and Wohl, A.. “The Demand for Stocks: An Analysis of IPO Auctions.” Review of Financial Studies, 12 (1999), 227247.
Karceski, J.Returns-Chasing Behavior, Mutual Funds and Beta's Death.” Working Paper, Univ. of Florida (2000).
Keim, D., and Stambaugh, R.. “Predicting Returns in the Stock and Bond Markets.” Journal of Financial Economics, 17 (1986), 357390.
Kraus, A., and Stoll, H.. “Price Impacts of Block Trading on the New York Stock Exchange.” Journal of Finance, 27 (1972), 569588.
Lee, C.; Shleifer, A.; and Thaler, R.. “Investor Sentiment and the Closed-End Fund Puzzle.” Journal of Finance, 46 (1991), 75109.
Lynch, A., and Mendenhall, R.. “New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index.” Journal of Business, 70 (1997), 351383.
Mikkelson, W., and Partch, M.. “Stock Price Effects and Costs of Secondary Distribution.” Journal of Financial Economics, 14 (1985), 165194.
Phillips, P., and Perron, P.. “Testing for a Unit Root in Time Series Regression.” Biometrika 75 (1988), 335346.
Pruitt, S., and Wei, J.. “Institutional Ownership and Changes in the S&P 500.” Journal of Finance, 45 (1989), 509513.
Sanger, G., and Peterson, J.. “An Empirical Analysis of Common Stock Delistings.” Journal of Financial and Quantitative Analysis, 25 (1990), 261272.
Scholes, M. S.The Market for Securities: Substitution versus Price Pressure and the Effects of Information on Share Prices.” Journal of Business, 45 (1972), 179211.
Schwarz, G.Estimating the Dimension of a Model.” Annals of Statistics, 6 (1978), 416464.
Schwert, G. W.Stock Returns and Real Activity: A Century of Evidence.” Journal of Finance, 45 (1990), 12371257.
Shleifer, A.Do Demand Curves for Stocks Slope Down?Journal of Finance, 41 (1986), 579590.
Stambaugh, R. F.Bias in Regression with Lagged Stochastic Regressors.” CRSP Working Paper No. 156, Univ. of Chicago (1986).
Warther, V. A.Aggregate Mutual Fund Flows and Security Returns.” Journal of Financial Economics, 39 (1995), 209235.
Warther, V. A. “Has the Rise of Mutual Funds Increased Marked Instability?” In Brookings-Wharton Papers on Financial Services, Litan, R. and Santomero, A., eds. Washington, D.C.: Brooking Institution (1998), 239280.
Zheng, L.Who Moves the Market? A Study of Stock Prices and Investment Cash Flows.” Working Paper, Univ. of Michigan (1998).
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed