Does Arbitrage Flatten Demand Curves for Stocks?

43 Pages Posted: 3 Aug 2000

See all articles by Jeffrey Wurgler

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Ekaterina Zhuravskaya

Paris School of Economics (PSE)

Multiple version iconThere are 3 versions of this paper

Date Written: June 2000


In textbook theory, demand curves for stocks are kept flat by riskless arbitrage between perfect substitutes. In reality, however, individual stocks do not have perfect substitutes. The risk inherent in arbitrage between imperfect substitutes may deter risk-averse arbitrageurs from flattening demand curves. Consistent with this suggestion and a simple model of demand curves for stocks, we find that stocks without close substitutes experience differentially higher price jumps upon inclusion into the S&P 500 Index. We conjecture that arbitrage forces are weakest, and other pricing anomalies are severest, among stocks without close substitutes (which include small stocks).

JEL Classification: G1

Suggested Citation

Wurgler, Jeffrey A. and Zhuravskaya, Ekaterina, Does Arbitrage Flatten Demand Curves for Stocks? (June 2000). Yale SOM Working Paper No. ICF - 99-12. Available at SSRN: or

Jeffrey A. Wurgler (Contact Author)

NYU Stern School of Business ( email )

Stern School of Business
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Ekaterina Zhuravskaya

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014

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