Many economic questions require estimating the price effect of demand shifts (multipliers) in the bond market. Corporate bonds have salient characteristics that distinguish close versus distant substitutes. We show that accounting for the heterogeneous substitutability between bonds is critical for estimating multipliers correctly. By allowing for heterogeneous substitution, we find that security-level multipliers are very small – an order of magnitude smaller than the estimate ignoring heterogeneous substitutability. Nonetheless, portfolio multipliers are substantially larger and monotonically increase with the aggregation level. Furthermore, we find that the multiplier is larger for high-yield bonds, longer-maturity bonds, and bonds with greater arbitrage risks.
