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


  • Cha, Heung-Joo
  • Lee, Bong-Soo


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.

Suggested Citation

  • Cha, Heung-Joo & Lee, Bong-Soo, 2001. "The Market Demand Curve for Common Stocks: Evidence from Equity Mutual Fund Flows," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(2), pages 195-220, June.
  • Handle: RePEc:cup:jfinqa:v:36:y:2001:i:02:p:195-220_00

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    Cited by:

    1. David Colwell & Julia Henker & Terry Walter, 2008. "Effect of Investor Category Trading Imbalances on Stock Returns," International Review of Finance, International Review of Finance Ltd., vol. 8(3‐4), pages 179-206, September.
    2. Naik, Pramod Kumar & Padhi, Puja, 2014. "An Empirical Evidence of Dynamic Interaction between institutional fund flows and Stock Market Returns," MPRA Paper 57723, University Library of Munich, Germany.
    3. David Ling & Gianluca Marcato & Pat McAllister, 2009. "Dynamics of Asset Prices and Transaction Activity in Illiquid Markets: the Case of Private Commercial Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 39(3), pages 359-383, October.
    4. Jeffrey Fisher & David C. Ling & Andy Naranjo, 2009. "Institutional Capital Flows and Return Dynamics in Private Commercial Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(1), pages 85-116, March.
    5. repec:eee:jimfin:v:92:y:2019:i:c:p:62-74 is not listed on IDEAS
    6. repec:eee:crpeac:v:25:y:2014:i:3:p:226-236 is not listed on IDEAS
    7. repec:eee:riibaf:v:42:y:2017:i:c:p:816-831 is not listed on IDEAS
    8. Lee, Bong Soo & Paek, Miyoun & Ha, Yeonjeong & Ko, Kwangsoo, 2015. "The dynamics of market volatility, market return, and equity fund flow: International evidence," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 214-227.
    9. repec:kap:iaecre:v:16:y:2010:i:1:p:80-95 is not listed on IDEAS
    10. Martin Dierker & Jung-Wook Kim & Jason Lee & Randall Morck, 2016. "Investors’ Interacting Demand and Supply Curves for Common Stocks," Review of Finance, European Finance Association, vol. 20(4), pages 1517-1547.
    11. David Ling & Andy Naranjo, 2006. "Dedicated REIT Mutual Fund Flows and REIT Performance," The Journal of Real Estate Finance and Economics, Springer, vol. 32(4), pages 409-433, June.
    12. Kim, Sei-Wan & Lee, Bong-Soo & Kim, Young-Min, 2014. "Who mimics whom in the equity fund market? Evidence from the Korean equity fund market," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 199-218.
    13. Jaebeom Kim & Jung-Min Kim, 2016. "Stock Returns and Mutual Fund Flows in the Korean Financial Market: A System Approach," Working Papers 2016-3, Economic Research Institute, Bank of Korea.
    14. Xing, Xuejing, 2008. "Do demand curves for stocks slope down?: Evidence from aggregate data," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(3), pages 641-651, August.
    15. Hong, Gwangheon & Lee, Bong Soo, 2011. "The trading behavior and price impact of foreign, institutional, individual investors and government: Evidence from Korean equity market," Japan and the World Economy, Elsevier, vol. 23(4), pages 273-287.
    16. Betermier, Sebastien & Calvet, Laurent & Jo, Evan, 2019. "A Supply and Demand Approach to Equity Pricing," CEPR Discussion Papers 13974, C.E.P.R. Discussion Papers.
    17. Watson, John & Wickramanayake, J., 2012. "The relationship between aggregate managed fund flows and share market returns in Australia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 451-472.
    18. Crystal Lin & Kenneth Yung, 2006. "Equity Capital Flows and Demand for REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 33(3), pages 275-291, November.
    19. Oh, Natalie Y. & Parwada, Jerry T., 2007. "Relations between mutual fund flows and stock market returns in Korea," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(2), pages 140-151, April.
    20. Paek, Miyoun & Ko, Kwangsoo, 2014. "Aggregate net flows, inflows, and outflows of equity funds: The U.S. versus Japan," Japan and the World Economy, Elsevier, vol. 32(C), pages 85-95.
    21. Christos Alexakis & Emmanouil Mavrakis, 2010. "Is Moderate Market Performance in the U.S. a Sufficient Condition for Abnormal Returns on CEFs?," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 16(1), pages 80-95, February.
    22. Kim, Ho-Yong & Kwon, Okyu & Oh, Gabjin, 2016. "A causality between fund performance and stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 443(C), pages 439-450.
    23. Beng Soon Chong & Zhenbin Liu, 2016. "CAR associated with SEO share lockups: Real or illusionary?," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 513-541, October.

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