State Space Model to Detect Cycles in Heterogeneous Agents Models

Filippo Gusella and Giorgio Ricchiuti

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: We propose an empirical test to depict possible endogenous cycles within Heterogeneous Agent Models (HAMs). We consider a 2-type HAM into a standard small-scale dynamic asset pricing framework. On the one hand, fundamentalists base their expectations on the deviation of fundamental value from market price expecting a convergence between them. On the other hand, chartists, subject to self-fulling moods, consider the level of past prices and relate it to the fundamental value acting as contrarians. These pricing strategies, by their nature, cannot be directly observed but can cause the response of the observed data. For this reason, we consider the agents' beliefs as unobserved state components from which, through a state space model formulation, 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, daily, monthly, and quarterly.

Keywords: Heterogeneous Agents Models; Endogenous Cycles; State Space Model; Kalman Filter (search for similar items in EconPapers)
JEL-codes: C13 E32 G10 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2021
New Economics Papers: this item is included in nep-mac
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