Causal Inference for Asset Pricing
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.
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Copy CitationValentin Haddad, Zhiguo He, Paul Huebner, Péter Kondor, and Erik Loualiche, "Causal Inference for Asset Pricing," NBER Working Paper 35413 (2026), https://doi.org/10.3386/w35413.Download Citation
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