Using Instrumental Variables to Measure Elasticity

What if markets move not by logic, but by pressure? In this conversation, Alan Dunne and Yoav Git trace the invisible currents behind price formation, namely how a single dollar of inflow can lift valuations fivefold, and why that distortion challenges everything the efficient market promised. From the slow mechanics of supply and demand to the moral hazards of policy and liquidity, the discussion follows money as it reshapes narrative. They revisit research that foresaw inflation’s return, and question why QIS indices so often fade in practice. Beneath it all lies a quiet question: what truly drives the modern market?

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Episode TimeStamps:

00:00:23 – Opening and agenda for the discussion

00:01:05 – Math education in the UK and XTX’s push to fund young talent

00:03:39 – Market performance recap for early November

00:04:49 – Reflections on volatility and fixed income trading conditions

00:05:13 – Introduction to the “Inelastic Markets Hypothesis”

00:05:53 – Supply, demand, and elasticity explained in market terms

00:10:30 – Instrumental variables and how economists measure elasticity

00:14:51 – The debate: if markets clear, how can flows move prices?

00:15:44 – Why equities are more inelastic than bonds

00:21:04 – Questioning the 5x effect and how flows follow prices

00:23:48 – Policy and moral hazard implications of inelastic markets

00:26:07 – How elasticity differences shape trend-following speeds

00:29:57 – Should all markets use the same trading models?

00:36:19 – “Best Strategies for Inflationary Times” revisited

00:38:30 – Why the paper predicted 2022 so accurately

00:42:03 – The nature of trend following: slow losses, fast wins

00:44:24 – Inflation mandates and the overlooked role of CTAs

00:48:33 – Why TIPS and real estate can fail as inflation hedges

00:50:05 – Examining “Quantifying Backtest Overfitting” in QIS

00:53:59 – The 60% haircut between backtests and live returns

00:56:00 – How CTAs add value beyond bank QIS products

01:00:40 – QIS as a low-cost, capital-efficient exposure

01:01:15 – Closing thoughts and next week’s preview

01:01:59 – Outro and disclaimer

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