Endogenous Cycles In Heterogeneous Agent Models: A State-Space Approach

The Institute of Economics will hold the next meeting of its Seminar Series on Tuesday, March 28, 2023: Giorgio Ricchiuti, from the University of Florence, will present the paper "Endogenous Cycles In Heterogeneous Agent Models: A State-Space Approach".

Abstract:

This paper proposes 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. Fundamentalists base their expectations on the fundamental value, while chartists, subject to self-fulfilling moods, 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 percentage of speculators in the short-term horizon. In addition, results indicate time-varying behavioral heterogeneity within-group. Moreover, the model exhibits better long-run out-of-sample forecasting accuracy compared to the benchmark random walk model.

The seminar will be held in person in Aula Magna Storica.