i am currently working on a paper on demand curves for stocks and have some questions. I've read that many models (CAPM, APT, Modigliani-Miller theorem) assume demand curves for stocks to be flat. Can you tell me why? Now research suggests that they actually slope down. Why is this relevant and what implications does this have?
In a framework such as CAPM, agents are assumed to be rational, and usually to have identical preferences. All agents have access to the same information, and agree on the level of riskiness of every particular stock. As returns are a reward for taking risk, the price of every asset do not depend on the supply but on its riskiness. Thus, the demand curve is flat: no matter how much of asset A their is on the market, nobody wants to pay a premium which would lead to have a lower reward for a same level of risk.
This models have very strong and restrictive assumptions, which is why we end up with this weird infinitely price-elastic demand curve. More complex models, with less restrictive assumptions, might produce downward sloping demand curves.