Short- versus Long-run Demand Elasticities in Asset Pricing

Abstract

The recent literature on demand-system asset pricing estimates the slope of investors’ demand curves from static logit regressions, implying counterfactual exper- iments have constant impacts that do not revert over time. Using investors’ trades at different horizons, I provide reduced-form evidence that elasticities increase significantly in the long run. To capture these dynamics structurally, I propose a partial adjustment model differentiating between short- and long-run elasticities. I find that the price impact from counterfactuals is four times larger at quarterly horizons than in the long-run equilibrium. The model accounts for investor inertia, captures long-run reversal, and provides insights into return predictability.

Keywords: demand elasticity, demand system, Partial Adjustment, Inertia, Long run reversal

JEL Classification: G11, G12, G14, G23