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

Abstract

We examine whether the market demand curve for equitiesis dawnward sloping. Unlike previous studies thatexamine individual stocks' demand curves, we look atthe aggregate demand curve. As a proxy for aggregatedemand, we employ equity mutual fund flows. Unlikeprevious studies that focus on events that areunlikely to convey new information to the market, wedevise an empirical framework that disentangles theprice-pressure effect and the information effect. Wedo not find evidence for the price-pressure effectthat equity fund flows directly affect stock marketprices in the presence of fundamentals of firms.Instead, we find that equity fund flows seem to beinfluenced by the performance of the stock marketand that investors try to forecast fundamentals offirms and change their demand for stocksaccordingly. Overall, these findings are with ahorizontal market demand curve for equities.