Does New Cash Make Stocks Go Up?
Bloomberg Businessweek|October 04, 2021
Theory said more investors coming into the market doesn’t matter. Then meme stocks hit
By Justina Lee
Does New Cash Make Stocks Go Up?

For years, Jean-Philippe Bouchaud, a physicist turned-money manager in Paris, has been trying to convince his old-school peers of a wild idea: When lots of people buy a stock, the price goes up.

Wait—that’s obvious, right? Not really. For decades, financial theory has been built on the premise that a share price reflects everything known at any moment about a company’s value. When a company announces an earnings number, some traders see it as a bullish sign, others are bearish, and they trade with each other to settle on a price. In this model, it doesn’t really matter if a million or a billion dollars flow into stock. After all, for every buyer, there must be a seller. If a flood of buyers were to push the price too high, more sellers should quickly step in to take advantage.

But Bouchaud’s more intuitive take—that flows of cash really do move prices—is catching on among the data-minded investors known as quants. That’s partly thanks to an influential 2020 paper by academics Xavier Gabaix of Harvard and Ralph Koijen of the University of Chicago. It’s also a matter of timing: The stock price surges unleashed by Reddit chat boards have shown what can happen when new investors pour into a stock. “It’s really important that this event on the Reddit stocks happened suddenly,” says Bouchaud, chairman of Capital Fund Management. It threw light on the idea that “prices move because people do things independently of fundamental value.”

This story is from the October 04, 2021 edition of Bloomberg Businessweek.

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This story is from the October 04, 2021 edition of Bloomberg Businessweek.

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