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 agents’ beliefs aboutthe future are unobserved and can be modelled in a statespace model. We use the Kalman filter to identify the twobehavioral rules and evaluate whether the conditions for theexistence of cycles hold. The model is estimated for equityand housing prices for France, Germany, the UK and the United States, for the period 1970–2017, with annual and quarterly data. We find robust empirical support for the ex-istence of endogenous financial cycles in equity markets forall countries and for France, the UK and the United Statesfor housing markets