Do Common Stocks Have Perfect Substitutes? Product Market Competition and the Elasticity of Demand for Stocks

Ahern, Kenneth R.

doi:10.2139/ssrn.1595775

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Do Common Stocks Have Perfect Substitutes? Product Market Competition and the Elasticity of Demand for Stocks

Review of Economics and Statistics, 2014, vol. 96(4): 756-766.

36 Pages Posted: 26 Apr 2010 Last revised: 30 Mar 2016

See all articles by Kenneth R. Ahern

Kenneth R. Ahern

University of Southern California - Marshall School of Business; National Bureau of Economic Research (NBER)

Date Written: September 10, 2013

Abstract

Though common stocks are one of the most important assets in an economy, little is known about their demand curves. I estimate demand curves for 144 NYSE stocks using a unique dataset of all orders, including off-equilibrium orders, during three months in 1990-1991. Connecting asset pricing with industrial organization, I find that stocks of firms in less competitive industries are more elastic because they have closer substitutes than stocks in more competitive industries. Tests that exploit the 1991 Gulf War shock and S&P 500 Index additions confirm these results.

Keywords: Elasticity, Liquidity, Product Market Competition, Stock Prices

JEL Classification: G12, G14, L11

Suggested Citation: Suggested Citation

Ahern, Kenneth Robinson, Do Common Stocks Have Perfect Substitutes? Product Market Competition and the Elasticity of Demand for Stocks (September 10, 2013). Review of Economics and Statistics, 2014, vol. 96(4): 756-766., Available at SSRN: https://ssrn.com/abstract=1595775 or http://dx.doi.org/10.2139/ssrn.1595775