Animal Spirits and Value at Risk Estimation

25 Pages Posted: 18 Apr 2014

See all articles by Grzegorz Andruszkiewicz

Grzegorz Andruszkiewicz

Imperial College London

Mark Davis

Imperial College London

Sebastien Lleo

NEOMA Business School

Date Written: April 8, 2014

Abstract

In this paper we estimate behavioural factors -- Keynes' 'animal spirits' -- in the property market. An enhanced Hidden Markov Model is used, for both the Shiller Home Price Index and a consumer confidence index. We conclude that both house prices and consumer confidence are driven by another hidden behavioural factor: 'animal spirits.' Both data series imply similar paths of the hidden factor. The estimated model is used for VaR calculation and forecasting. We introduce an intuitive method to include crisis scenarios in the model, which proves to produce much better risk estimates during credit crunch, without substantially affecting the distribution during growth periods.

Keywords: animal spirits, behavioural finance, value at risk, hidden Markov models, estimation

JEL Classification: F47, G00, G12, G14

Suggested Citation

Andruszkiewicz, Grzegorz and Davis, Mark and Lleo, Sebastien, Animal Spirits and Value at Risk Estimation (April 8, 2014). Available at SSRN: https://ssrn.com/abstract=2425865 or http://dx.doi.org/10.2139/ssrn.2425865

Grzegorz Andruszkiewicz (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Mark Davis

Imperial College London ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom
02075948486 (Phone)

HOME PAGE: http://www.ma.ic.ac.uk/~mdavis

Sebastien Lleo

NEOMA Business School ( email )

Reims
France

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