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

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.”

Continue reading your story on the app

Continue reading your story in the magazine

MORE STORIES FROM BLOOMBERG BUSINESSWEEKView All

De-radicalizing the Extremists

Parents for Peace enlists ex-believers to help families win back loved ones drawn to Islamism, QAnon, and other ideologies. Demand has never been higher

10+ mins read
Bloomberg Businessweek
October 18 - 25, 2021

Europe's Energy Crisis Is Coming for The Rest of Us

Millions of people around the globe will feel the impact of soaring natural gas prices this winter

5 mins read
Bloomberg Businessweek
October 04, 2021

Big Sky's Moment of Glory

The most rugged resort in Montana gets speedy lifts, luxury hotels, and fine dining to match its extreme slopes

6 mins read
Bloomberg Businessweek
October 18 - 25, 2021

Black Hairstyles Need Protection

In most U.S. states, employers and schools are allowed to discriminate against box braids, locs, and other traditional styles. A coalition of activists and legislators has started to change that.

10+ mins read
Bloomberg Businessweek
October 18 - 25, 2021

High Stakes On the Lake

Justin Bibb wants to be Cleveland’s next mayor. If he beats Kevin Kelley, he’ll inherit serious problems—and a windfall to fix them

5 mins read
Bloomberg Businessweek
October 18 - 25, 2021

Can twitter get us to be nice?

Social networks are all designed to make people angry and keep them coming back for more. Now, one of the worst offenders is trying to be less of a hellscape

10+ mins read
Bloomberg Businessweek
October 18 - 25, 2021

Let's Make Covid Testing Part of Our Morning Routine

A Harvard immunologist champions low-cost, at-home rapid tests to beat the pandemic

6 mins read
Bloomberg Businessweek
October 18 - 25, 2021

Homeopath, heal thyself

Natalie Grams believed—really believed—in the healing power of homeopathy. Then a health crisis of her own forced the German physician to question her faith

10+ mins read
Bloomberg Businessweek
October 18 - 25, 2021

Stuck on the Sidelines of The U.S. Job Market

Conversations with some of the 5 million out-of-work Americans shed light on why so many jobs are going begging

8 mins read
Bloomberg Businessweek
October 18 - 25, 2021

The Hunt for the Most Lucrative Patients

Privately run Medicare Advantage programs get paid more when members look sicker—even if they don’t receive more care

6 mins read
Bloomberg Businessweek
October 18 - 25, 2021