Friday Seminar - William Fuchs (University of Texas Austin)
Welcome to an academic seminar hosted by the Swedish House of Finance and the Department of Finance.
Paper
A Trilemma for Asset Demand Estimation
Abstract
We establish fundamental limits on demand analysis in asset markets. Given
observational data, one cannot jointly maintain (i) no-arbitrage asset pricing,
(ii) investor preferences over payoffs, and(iii) model-free identification of structural asset demand.
These results follow from a decomposition of asset demand into fundamental preferences and a latent mapping from preferences to asset holdings.
This mapping is fundamentally unobservable, varies with routine changes to expected asset payoffs, and links all asset-level demand functions into a non-separable system. As such, even perfectly exogenous supply shifters cannot produce the price variation required to estimate stable asset demand curves. We conclude that asset demand elasticities are contingent, model-specific constructs which reflect—rather than validate—a priori assumptions on investor behavior.