Publications
How Competitive is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing with Valentin Haddad and Erik Loualiche
Forthcoming, American Economic Review
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WFA 2022 Elsevier Best Paper on Financial Institutions
2021 Q-Group Jack Treynor Prize
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The conventional wisdom in finance is that competition is fierce among investors: if a group changes its behavior, others adjust their strategies such that nothing happens to prices. We estimate a demand system with flexible strategic responses for institutional investors in the US stock market. When less aggressive traders surround an investor, she adjusts by trading more aggressively. However, this strategic reaction only counteracts two thirds of the impact of the initial change in behavior. In light of these estimates, the rise in passive investing over the last 20 years has made the demand for individual stocks 11% more inelastic.
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Featured: Financial Times, Risk.net, UCLA Anderson Review
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Causal Inference for Asset Pricing with Valentin Haddad, Zhiguo He, Erik Loualiche, and Peter Kondor
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This paper provides a guide for using causal inference with asset prices and quantities.
Our framework revolves around two simple assumptions: homogenous substitution conditional on observables and constant relative elasticity. Under these assumptions, standard cross-sectional instrumental variable or difference-in-difference regressions identify the relative demand elasticity between assets, the difference between own-price and cross-price elasticity. In contrast, identifying aggregate elasticities and substitution along specific characteristics necessarily relies jointly on exogenous sources of time-series variation alone. The same principles apply to the estimation of multipliers measuring the price impact of supply or demand shocks. The two assumptions map to familiar restrictions on covariance matrices in classical asset pricing models, encompass models from the industrial organization literature such as logit, and accommodate rich substitution patterns even outside of these models. We discuss how to design experiments satisfying these conditions and offer diagnostics to validate them.
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The Making of Momentum: A Demand-System Perspective
WFA 2023 Brattle Group Ph.D. Candidate Award
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I develop a framework to quantify which features of investors’ dynamic trading strategies lead to momentum in equilibrium. I distinguish persistent demand shocks, capturing underreaction, and the term structure of demand elasticities, representing arbitrage intensities decreasing with investor horizon. I introduce both channels into an asset demand system that I estimate from institutional investors’ portfolio holdings and prices. Investors respond more to short-term than longer-term price changes: the term structure of elasticities is downward-sloping, creating momentum, whereas demand shocks mean-revert, contributing toward reversal. Stocks with more investors with downward-sloping term structures exhibit stronger momentum returns by 7% per year.
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