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Detecting and Measuring Financial Cycles in Heterogeneous Agents Models: An Empirical Analysis

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  • Filippo Gusella

Abstract

This paper proposes a macroeconometric analysis to depict and measure possible financial cycles that emerge due to the dynamic interaction between heterogeneous market participants. We consider 2-type heterogeneous speculative agents: Trend followers tend to follow the price trend while contrarians go against the wind. As agents' beliefs are unobserved variables, we construct a state-space model where heuristics are considered as unobserved state components and from which the conditions for endogenous cycles can be mathematically derived and empirically tested. Further, we specifically measure the length of endogenous financial cycles. The model is estimated using the equity price index for the 1960–2020 period for the UK, France, Germany, and the USA. We find empirical evidence of endogenous financial cycles for all four countries, with the highest frequencies in the USA and the UK.

Suggested Citation

  • Filippo Gusella, 2022. "Detecting and Measuring Financial Cycles in Heterogeneous Agents Models: An Empirical Analysis," Working Papers - Economics wp2022_02.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    • Handle: RePEc:frz:wpaper:wp2022_02.rdf
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    Cited by:

    1. Deborah Noguera & Gabriel Montes-Rojas, 2023. "Minskyan model with credit rationing in a network economy," SN Business & Economics, Springer, vol. 3(3), pages 1-26, March.

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    More about this item

    Keywords

    Heterogeneous Agent Models; Heterogeneous Expectations; Endogenous Cycles; State Space Model; Period of Cycles;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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