Causal Inference for Asset Pricing

Valentin Haddad, Zhiguo He (), Paul Huebner, Péter Kondor and Erik Loualiche

No 35413, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Portfolio choice involves substituting across many assets at once, complicating inference about asset demand. An elementary condition often captures this behavior in theory and practice: homogeneous substitution conditional on observables (e.g., factor loadings, maturity, credit ratings). We characterize natural experiments identifying demand elasticity and price impact under this condition. Cross-sectional IV and difference-in-differences identify relative elasticity, own- minus cross-price elasticity for assets sharing observables. But a missing-coefficient problem leaves substitution unidentified: the coefficients on observables mechanically absorb it. Identifying substitution requires time-series regressions on portfolios sorted on observables. We apply the framework to corporate bonds, comparing alternative Fed asset-purchase programs.

JEL-codes: G10 G20 L00 (search for similar items in EconPapers)
Date: 2026-07
Note: AP
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