Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-15T04:36:27.026Z Has data issue: false hasContentIssue false
  • English
  • Français

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
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

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.

References

Akaike, H.“A New Look at the Statistical Identification Model.” IEEE Transactions on Automatic Control, 19 (1974), 716–723.10.1109/TAC.1974.1100705CrossRefGoogle Scholar
Campbell, J. Y. “A Variance Decomposition for Stock Returns.” Economic Journal, 101 (1991) 157–179.10.2307/2233809CrossRefGoogle Scholar
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), 195–228.10.1093/rfs/1.3.195CrossRefGoogle Scholar
Cohen, R. “Asset Allocation Decisions of Individuals and Institutions.” Working Paper, Harvard Univ. (1999).Google Scholar
Dann, L.; Mayers, D.; and Raab, R. Jr, “Trading Rules, Large Blocks and the Speed of Price Adjustment.” journal of Financial Economics, 4 (1977), 3–22.10.1016/0304-405X(77)90034-4CrossRefGoogle Scholar
Davidson, W., III; Chhachhi, I.; and Glascock, J.. “A Test for Price Pressure Effects in Tender Offer Stock Repurchases.” Financial Review, 31 (1996), 25–49.10.1111/j.1540-6288.1996.tb00862.xCrossRefGoogle Scholar
Dhillon, U., and Johnson, H.. “Changes in the Standard and standard and Poor's 500 List.” Journal of Business, 64 (1991), 75–85.10.1086/296526CrossRefGoogle Scholar
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), 427–431.10.2307/2286348Google Scholar
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).Google Scholar
Edwards, F., and Zhang, X.. “Mutual Funds and Stock and Bond Market Stability.” Journal of Financial Services Research, 13 (1998), 257–282.10.1023/A:1008084311260CrossRefGoogle Scholar
Engle, R., and Granger, W.. “Cointegration and Error Correction: Representation, Estimation and Testing. Econometrica, 55 (1987), 251–276.10.2307/1913236CrossRefGoogle Scholar
Engle, R. and Yoo, B.. “Forecasting and Testing in Cointegrated Systems.” Journal of Econometrics, 35 (1987), 173–159.10.1016/0304-4076(87)90085-6CrossRefGoogle Scholar
Fama, E. F. “Stock Returns, Expected Returns, and Real Acivity.” Journal of Finance, 45 (1990), 1089–1109.10.2307/2328716CrossRefGoogle Scholar
Fama, E., and French, K.. “Business Conditions and Expected Returns on Stocks and Bonds.” Journal of Financial Economics, 25 (1989), 23–49.10.1016/0304-405X(89)90095-0CrossRefGoogle Scholar
Fortune, P. “Mutual Funds, Part II: Fund Flows and Security Returns.” New England Economic Review (01 –Feb. 1998), 3–22.Google Scholar
Goetzmann, W., and Jorion, P.. “Testing the Predictive Power of Dividend Yields.” Journal of Finance, 47 (1993), 663–679.10.2307/2328917CrossRefGoogle Scholar
Goetzmann, W., Massa, M.. “Index Funds Investors and Stock Market Growth. Working Paper, Yale Univ. (1998).Google Scholar
Goetzmann, W.; Massa, M.; and Rouwenhorst, K.. “Behavioral Factors in Mutual Fund Flows. Working Paper, Yale Univ. (2000).CrossRefGoogle Scholar
Granger, C. W. “Some Recent Developments in a Concept of Causality.” Journal of Econometrics. 39 (1988), 199–211.10.1016/0304-4076(88)90045-0CrossRefGoogle Scholar
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), 815–829.10.2307/2328230CrossRefGoogle Scholar
Hess, A. and Frost, P.. “Tests for Price Effects of New Issues of Seasoned Securities.” Journal of Finance, 36 (1982), 11–25.10.2307/2327114CrossRefGoogle Scholar
Hodrick, R. J. “Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement.” Review of Financial Studies, 5 (1992), 357–386.10.1093/rfs/5.3.357CrossRefGoogle Scholar
Jain, P. C. “The Effect on Stock Price of Inclusion in or Exclusion from the S&P 500.” Financial Analysts Journal, 43 (1987), 58–65.10.2469/faj.v43.n1.58CrossRefGoogle Scholar
Kalay, A., and Shimrat, A.. “Firm Value and Seasoned Equity Issues: Price Pressure, Wealth Redistribution, or Negative Information.” Journal of Financial Economics, 19 (1987), 109–126.10.1016/0304-405X(87)90031-6CrossRefGoogle Scholar
Kandel, S.; Sarig, O.; and Wohl, A.. “The Demand for Stocks: An Analysis of IPO Auctions.” Review of Financial Studies, 12 (1999), 227–247.10.1093/rfs/12.2.227CrossRefGoogle Scholar
Karceski, J. “Returns-Chasing Behavior, Mutual Funds and Beta's Death.” Working Paper, Univ. of Florida (2000).Google Scholar
Keim, D., and Stambaugh, R.. “Predicting Returns in the Stock and Bond Markets.” Journal of Financial Economics, 17 (1986), 357–390.10.1016/0304-405X(86)90070-XCrossRefGoogle Scholar
Kraus, A., and Stoll, H.. “Price Impacts of Block Trading on the New York Stock Exchange.” Journal of Finance, 27 (1972), 569–588.10.2307/2978262CrossRefGoogle Scholar
Lee, C.; Shleifer, A.; and Thaler, R.. “Investor Sentiment and the Closed-End Fund Puzzle.” Journal of Finance, 46 (1991), 75–109.10.2307/2328690Google Scholar
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), 351–383.10.1086/209722CrossRefGoogle Scholar
Mikkelson, W., and Partch, M.. “Stock Price Effects and Costs of Secondary Distribution.” Journal of Financial Economics, 14 (1985), 165–194.10.1016/0304-405X(85)90013-3CrossRefGoogle Scholar
Phillips, P., and Perron, P.. “Testing for a Unit Root in Time Series Regression.” Biometrika 75 (1988), 335–346.10.1093/biomet/75.2.335CrossRefGoogle Scholar
Pruitt, S., and Wei, J.. “Institutional Ownership and Changes in the S&P 500.” Journal of Finance, 45 (1989), 509–513.10.2307/2328603CrossRefGoogle Scholar
Sanger, G., and Peterson, J.. “An Empirical Analysis of Common Stock Delistings.” Journal of Financial and Quantitative Analysis, 25 (1990), 261–272.10.2307/2330828S0022109000007158CrossRefGoogle Scholar
Scholes, M. S. “The Market for Securities: Substitution versus Price Pressure and the Effects of Information on Share Prices.” Journal of Business, 45 (1972), 179–211.10.1086/295444CrossRefGoogle Scholar
Schwarz, G. “Estimating the Dimension of a Model.” Annals of Statistics, 6 (1978), 416–464.10.1214/aos/1176344136CrossRefGoogle Scholar
Schwert, G. W. “Stock Returns and Real Activity: A Century of Evidence.” Journal of Finance, 45 (1990), 1237–1257.10.2307/2328722CrossRefGoogle Scholar
Shleifer, A. “Do Demand Curves for Stocks Slope Down?” Journal of Finance, 41 (1986), 579–590.10.2307/2328486CrossRefGoogle Scholar
Stambaugh, R. F. “Bias in Regression with Lagged Stochastic Regressors.” CRSP Working Paper No. 156, Univ. of Chicago (1986).Google Scholar
Warther, V. A. “Aggregate Mutual Fund Flows and Security Returns.” Journal of Financial Economics, 39 (1995), 209–235.10.1016/0304-405X(95)00827-2CrossRefGoogle Scholar
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), 239–280.Google Scholar
Zheng, L. “Who Moves the Market? A Study of Stock Prices and Investment Cash Flows.” Working Paper, Univ. of Michigan (1998).Google Scholar