Testing fundamentalist–momentum trader financial cycles: An empirical analysis via the Kalman filter

Filippo Gusella; Engelbert Stockhammer

doi:10.1111/meca.12347

Testing fundamentalist–momentum trader financial cycles: An empirical analysis via the Kalman filter

Filippo Gusella^*, Engelbert Stockhammer

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

6 Citations (Scopus)

49 Downloads (Pure)

Abstract

This paper proposes an empirical test for Minskyan financial cycles in asset prices, driven by the interaction of fundamentalist and momentum traders. Both agents’ beliefs about the future are unobserved and can be modelled in a state space model. We use the Kalman filter to identify the two behavioral rules and evaluate whether the conditions for the existence of cycles hold. The model is estimated for equity and housing prices for France, Germany, the UK and the United States, for the period 1970–2017, with annual and quarterly data. We find robust empirical support for the existence of endogenous financial cycles in equity markets for all countries and for France, the UK and the United States for housing markets.

Original language	English
Pages (from-to)	758-797
Number of pages	40
Journal	Metroeconomica
Volume	72
Issue number	4
DOIs	https://doi.org/10.1111/meca.12347
Publication status	Published - Nov 2021

Keywords

financial cycles
house prices
Kalman filter
minsky
momentum traders
share prices

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10.1111/meca.12347

Metroeconomica - 2021 - Gusella - Testing fundamentalist momentum trader financial cycles An empirical analysis via theFinal published version, 1.98 MBLicence: CC BY

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title = "Testing fundamentalist–momentum trader financial cycles: An empirical analysis via the Kalman filter",

abstract = "This paper proposes an empirical test for Minskyan financial cycles in asset prices, driven by the interaction of fundamentalist and momentum traders. Both agents{\textquoteright} beliefs about the future are unobserved and can be modelled in a state space model. We use the Kalman filter to identify the two behavioral rules and evaluate whether the conditions for the existence of cycles hold. The model is estimated for equity and housing prices for France, Germany, the UK and the United States, for the period 1970–2017, with annual and quarterly data. We find robust empirical support for the existence of endogenous financial cycles in equity markets for all countries and for France, the UK and the United States for housing markets.",

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N2 - This paper proposes an empirical test for Minskyan financial cycles in asset prices, driven by the interaction of fundamentalist and momentum traders. Both agents’ beliefs about the future are unobserved and can be modelled in a state space model. We use the Kalman filter to identify the two behavioral rules and evaluate whether the conditions for the existence of cycles hold. The model is estimated for equity and housing prices for France, Germany, the UK and the United States, for the period 1970–2017, with annual and quarterly data. We find robust empirical support for the existence of endogenous financial cycles in equity markets for all countries and for France, the UK and the United States for housing markets.

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Testing fundamentalist–momentum trader financial cycles: An empirical analysis via the Kalman filter

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Keywords

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