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Modelling Minskyan financial cycles with fundamentalist and extrapolative price strategies: An empirical analysis via the Kalman filter approach

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  • Filippo Gusella

Abstract

In this paper we empirically analyse Minskyan financial cycles in asset prices, where the cycles are driven by the presence of two unobserved evaluation price strategies: the fundamentalist and the extrapolative price strategy. To achieve this, we construct a model, that incorporates the two behavioural equations and we investigate the financial cycles via a state space model. Using the Kalman filter, the conditions for the existence of cycles can be evaluated empirically. The model is estimated for four OECD countries using the times series of equity and housing prices over the period 1970-2017 for annual data. We find evidence of cycles in the equity market for the UK, France, Germany and the USA. Regarding housing prices, we find evidence of cyclical fluctuations in the UK, France and the USA but not in Germany. For both the equity market and the housing market, we find the highest price overshooting in the UK and the USA. Our results provide empirical support for the Minskyan theory, highlighting the role of the evaluation effect for an endogenous generation of cyclical phenomena in asset prices.

Suggested Citation

  • Filippo Gusella, 2019. "Modelling Minskyan financial cycles with fundamentalist and extrapolative price strategies: An empirical analysis via the Kalman filter approach," Working Papers - Economics wp2019_24.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    • Handle: RePEc:frz:wpaper:wp2019_24.rdf
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    Keywords

    Minsky cycles; asset prices; financial instability hypothesis; state space model; Kalman Filter;
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