The paper comes at a time when the movements in the prices of meme stocks and even America's bond market are confounding textbooks
At this point your columnist may be in danger of provoking guffaws. It has been a bad year for the textbooks. Retail investors have driven up the prices of meme stocks such as GameStop and. Cryptocurrencies, the fundamentals of which cannot easily be analysed, have soared too. Even America’s bond market is a puzzle: the ten-year Treasury yield is only 1.4% even though annual consumer-price inflation has reached 5.4%.
The first challenge is getting definitions straight. The financial press often writes about money flowing into stocks, but for a security to be bought, it also has to be sold. The authors’ definition of inflows relies on the fact that investment funds often promise to maintain a fraction of their portfolio in equities . A flow into stocks is defined as an investor using fresh cash, or the proceeds of selling bonds, to buy funds that hold at least some equities.
Does inelastic mean inefficient? A trader who could see flows coming would get rich quickly. But flows are hard to predict, says Mr Koijen. A true believer in markets might argue that unforeseeable flows are the mechanism by which the right price is reached, and reflect new information coming to the fore.
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