How (Not) to Identify Demand Elasticities in Dynamic Asset Markets

We evaluate approaches to estimating demand elasticities in dynamic asset markets, both theoretically and empirically. We establish strict necessary conditions that instrumented asset-price variation must satisfy for valid identification. Commonly used instruments violate these conditions, yielding estimates that are largely unrelated to true price elasticities and may even have the wrong sign. We derive transparent formulas for the biases that arise when instrumented price shifts persist or build up and propose an approximate bias-correction factor. Our dynamic general-equilibrium analysis characterizes the mapping from supply shock processes to price-shift processes, revealing severe shortcomings of standard multiplier calculations in multi-period settings.