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.