Measuring Demand
Two useful measures of Demand are the Demand Frontier and Aggregate Market Demand.
The Demand Frontier describes a market’s outer boundary. For the S&P 500, the dark green dots show the outermost quantities (stock volumes) and prices (split-adjusted stock prices). The Demand Frontier is the green line of best fit through them. It shows the market’s price limits and its reaction to price changes.
Another way to portray buyers’ price sensitivity is with Aggregate Market Demand. Here, an algorithm splits the stocks into price bins, distributed 1) equally concerning price, or unequally distributed to price following 2) a Fibonacci or 3) Geometric series for the number of observations per bin. In this case, a 6 bin split (divided by red lines) provides 5 red points (bin 5 is empty). Each red point is the total stock quantity in each bin and the average weighted price of those stocks. The red line through them is Aggregate Market Demand.
Demand Frontier and Aggregate Market Demand slopes converge with many observations. Here, the slope of the Demand Frontier is -0.244; the Aggregate Market Demand is -0.236. Good agreement between the slopes provides good evidence about market workings.
How does Value relate to Demand? Read the next post.
