The Elasticity of Quantitative Investment

Paper: arXiv 2303.14533

Authors: Carter Davis

Abstract

What is the demand elasticity of statistical arbitrageurs that invest according to the advice of modern cross-sectional asset pricing models? Thirteen models from the literature exhibit strikingly inelastic demand, in contrast to classical models that rely on statistical arbitrageurs to create elastic market demand for assets. This inelasticity arises from the difficulty of trading against price changes. A quantitative equilibrium model shows that aggregate demand remains inelastic even with these statistical arbitrageurs in the market.

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 8.0/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper provides a highly original challenge to classical asset pricing by empirically estimating the demand elasticity of statistical arbitrageurs across thirteen established models. Combining strong empirical testing with a quantitative general equilibrium framework, it offers compelling evidence that systemic trading frictions keep aggregate demand remarkably inelastic.

Research Flowchart

  flowchart TD
    A[Research Goal: Measure demand elasticity of statistical arbitrageurs] --> B[Input: 13 Cross-Sectional Asset Pricing Models]
    B --> C[Estimate Demand Curves & Trade Elasticity]
    C --> D[Identify Friction: Difficulty of trading against price changes]
    D --> E[Formulate Quantitative Equilibrium Model]
    E --> F[Outcome: Arbitrageurs exhibit strikingly inelastic demand]
    F --> G[Outcome: Aggregate market demand remains inelastic]