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, ownminus 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.