The majority of asset-management intermediaries (e.g., mutual funds, hedge funds) are structured on an open-end basis, even though it appears that the open-end form can be a serious impediment to arbitrage. I argue that the equilibrium degree of open-ending in an economy can be excessive from the point of view of investors. When funds compete for investors' dollars, they may engage in a counterproductive race towards the open-end form, even though this form leaves them ill-suited to undertaking certain types of arbitrage trades. One implication of the analysis is that, even absent short-sales constraints or other frictions, economically large mispricings can coexist with rational, competitive arbitrageurs who earn small excess returns

The majority of asset-management intermediaries (e.g., mutual funds, hedge funds) are structured on an open-end basis, even though it appears that the open-end form can be a serious impediment to arbitrage. I argue that when funds compete to attract investors' dollars, the equilibrium degree of open-ending in an economy can be excessive from the point of view of these investors. One implication of the analysis is that, even absent short-sales constraints or other frictions, economically large mispricings can coexist with rational, competitive arbitrageurs who earn small excess returns

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 ¥2,000 billion of trading in one week and large price changes followed by subsequent reversals for all of the reweighted stocks