Endogenous cycles in heterogeneous agent models: a state-space approach

Filippo Gusella and Giorgio Ricchiuti
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Filippo Gusella: Università degli Studi di Firenze

Journal of Evolutionary Economics, 2024, vol. 34, issue 4, No 2, 739-782

Abstract: Abstract This paper proposes an empirical test to identify possible endogenous cycles within heterogeneous agent models (HAMs). We consider a two-type HAM into a standard small-scale dynamic asset pricing framework. Fundamentalists base their expectations on the fundamental value, while chartists consider the level of past prices. Because these strategies, by their nature, cannot be directly observed but can cause the response of the observed data, we construct a state-space model where agents’ beliefs are considered the unobserved state components and from which the heterogeneity of fundamentalist-chartist trader cycles can be mathematically derived and empirically tested. The model is estimated using the S&P500 index for the period 1990–2020 at different time scales, specifically, quarterly, monthly, and daily. We find empirical evidence of endogenous damped fluctuations with a higher probability of chartist behavior in the short-term horizon. In addition, the model exhibits better long-run out-of-sample forecasting accuracy compared to the benchmark random walk model.

Keywords: Heterogeneous agent models; Fundamentalists; Chartists; Endogenous cycles; State-space model (search for similar items in EconPapers)
JEL-codes: C13 C50 E32 G10 G12 G15 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00191-024-00870-w

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