State Space Model to Detect Cycles in Heterogeneous Agents Models

34 Pages Posted: 1 Jun 2021

See all articles by Filippo Gusella

Filippo Gusella

University of Florence - Department of Economics and Management

Giorgio Ricchiuti

DISEI, Università degli Studi di Firenze

Date Written: May 30, 2021

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;

JEL Classification: C13; G10; E32

Suggested Citation

Gusella, Filippo and Ricchiuti, Giorgio, State Space Model to Detect Cycles in Heterogeneous Agents Models (May 30, 2021). Available at SSRN: https://ssrn.com/abstract=3856471 or http://dx.doi.org/10.2139/ssrn.3856471

Filippo Gusella

University of Florence - Department of Economics and Management ( email )

Via delle Pandette, 9
Firenze, Florence 50127
Italy

Giorgio Ricchiuti (Contact Author)

DISEI, Università degli Studi di Firenze ( email )

Via delle Pandette, 9
Firenze, Florence 50127
Italy

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