Testing fundamentalist-momentum trader financial cycles. An empirical analysis via the Kalman filter

This paper proposes an empirical test for Minskyan financial cycles in asset prices, driven by the interaction of fundamentalist and momentum traders. Both price strategies are unobserved and can be modelled in a state space model. We use the Kalman filter to identify the two pricing strategies and evaluate whether the conditions for the existence of cycles hold. The model is estimated for four major OECD countries, the UK, France, Germany and the USA, for equity and housing prices for the period 1970-2017 using annual data. We find evidence of cycles in the equity market for all four countries and for housing prices, in the UK, France and the USA but not in Germany. Our results provide empirical support for the existence of endogenous financial cycles on asset markets.