Animal Spirits and Value at Risk Estimation
25 Pages Posted: 18 Apr 2014
Date Written: April 8, 2014
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
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