Demand Elasticity in Dynamic Asset Pricing

Zhiguo He (), Péter Kondor and Jessica S. Li

No 34450, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The demand-system approach identifies asset demand slopes using residual supply shocks, presuming these shocks move expected returns but not risk. In dynamic economies, risk is endogenous: investors retrade, so demand depends on the joint distribution of current and future returns, which changes as investors absorb a shock. The shock therefore changes the demand curve it traces, violating the exclusion restriction. In a calibrated multi-asset dynamic model, the measured slope is roughly 40% of its conceptual counterpart, implying substantially steeper demand curves than standard estimates suggest. The bias persists even if shocks are infinitesimal and transitory. We discuss potential empirical remedies.

JEL-codes: D50 E10 G10 G11 (search for similar items in EconPapers)
Date: 2025-11
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