Abstract: We evaluate approaches to estimating demand elasticities in dynamic asset markets, both theoretically and empirically. We establish strict, necessary conditions that the dynamics of instrumented asset price variation must satisfy for valid identification. We illustrate these insights in a general equilibrium model of dynamic trade and derive the magnitude of biases that arise when these conditions are violated. Estimates based on static IO models are severely biased when the instrumented price variation is persistent or predictable. Empirically, we show that commonly used instruments yield elasticity estimates that are off by orders of magnitude, or even have the wrong sign. In contrast to standard multiplier calculations, our theory characterizes the dynamic asset market interventions required to sustain a given price path support process, with direct implications for policies such as Quantitative Easing (QE).
Discussant: Philippe van der Beck, Harvard University
Peter Kondor, London School of Economics and Political Science
Jessica Li, University of Chicago
Abstract: Standard demand elasticity estimation treats investors’ demand slopes as stable objects that can be traced out by exogenous residual supply shifts. We show this identification strategy fails in dynamic settings: supply shocks cause demand curves to tilt and shift through general equilibrium effects. The mechanism is intuitive — investors’ demand depends on the entire distribution of current and future returns, including volatility, covariances, and correlations with investment opportunities. Supply shocks that change today’s prices inevitably reshape future return distributions, moving the demand curve itself. We develop and calibrate a dynamic model to quantify this mismeasurement. The measured slope is approximately 40% of its conceptual counterpart, implying that demand curves are substantially steeper than estimated. This distortion operates through two channels: endogenous risk (altered volatility and covariances) and amplified intertemporal hedging (changed correlation with investment opportunities). The distortion remains sizable even for infinitesimal or purely transitory shocks.
Discussant: Hengjie Ai, University of Wisconsin-Madison
Mahyar Kargar, University of Illinois-Urbana-Champaign
Jiacui Li, University of Utah
Dejanir Silva, Purdue University
Abstract: We study how to estimate and interpret demand elasticities in dynamic settings where prices and flows are jointly determined. Because price changes necessarily alter expected returns or cash flows, there is no single context-free elasticity: measured elasticities depend on which expectations adjust. We formalize static, immediate, and dynamic elasticities and show that the dynamic elasticity equals the inverse of the equilibrium price multiplier. A tractable linear model delivers testable comparative statics linking price multipliers to risk, persistence, systematic exposure, and surprise. Empirically, we confirm these patterns and show that structural demand can be recovered from reduced-form price responses even under persistent shocks.
Discussant: Erik Loualiche, University of Minnesota
