Aggregate price effects of customer deposits: a study of the korean stock market

Abstract

We examine whether the market demand curve for equities is downward sloping using the unique daily Korean stock market flows. Unlike previous studies that examine individual stocks' demand curves, we look at the aggregate demand curve. As a proxy for aggregate demand, we employ customers' deposit 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 the deposit flows directly affect stock market prices in the presence of fundamentals of firms. Instead, we find that deposit 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 consistent with a horizontal market demand curve for equities.