Short- and long-term demand curves for stocks: Theory and evidence on the dynamics of arbitrage

  • Greenwood R
  • 98


    Mendeley users who have this article in their library.
  • 70


    Citations of this article.


I develop a framework to analyze demand curves for multiple risky securities at extended horizons in a setting with limits-to-arbitrage. Following an unexpected change in uninformed investor demand for several assets, I predict returns of each security to be proportional to the contribution of that security's demand shock to the risk of a diversified arbitrage portfolio. I show that securities that are not affected by demand shocks but are correlated with securities undergoing changes in demand should experience returns related to their hedging role in arbitrageurs' portfolios. Finally, I predict a negative cross-sectional relation between post-event returns and the initial return associated with the change in demand. I confirm these predictions using data from a unique redefinition of the Nikkei 225 index in Japan, in which 255 stocks simultaneously undergo significant changes in index investor demand, causing more than ¥2 billion of trading in one week and large price changes followed by subsequent reversals for all of the reweighted stocks. © 2004 Elsevier B.V. All rights reserved.

Author-supplied keywords

  • Demand curves
  • Event studies
  • Limits-to-arbitrage
  • Portfolio choice

Get free article suggestions today

Mendeley saves you time finding and organizing research

Sign up here
Already have an account ?Sign in

Find this document

Get full text


  • Robin Greenwood

Cite this document

Choose a citation style from the tabs below

Save time finding and organizing research with Mendeley

Sign up for free