Heterogeneous beliefs, regret, and uncertainty: The role of speculation in energy price dynamics

Marc Joëts

European Journal of Operational Research, 2015, vol. 247, issue 1, 204-215

Abstract: This paper proposes to investigate the impact of financialization on energy markets (oil, gas, coal, and electricity European forward prices) during both normal times and periods of extreme fluctuation by using an original behavioral and emotional approach. With this aim, we propose a new theoretical and empirical framework based on a heterogeneous agents model in which fundamentalists and chartists co-exist and are subject to regret and uncertainty. We find significant evidence that energy markets are composed of heterogeneous traders who behave differently depending on the intensity of the price fluctuations and the uncertainty context. In particular, energy prices are governed primarily by fundamental and chartist agents that are neutral to uncertainty during normal times, whereas these prices face irrational chartist investors averse to uncertainty during periods of extreme fluctuations. In this context, the recent surge in energy prices can be viewed as the consequence of irrational exuberance. Our new theoretical model is suitable for modeling energy price dynamics and outperforms both the random walk and the ARMA model in out-of-sample predictive ability.

Keywords: Energy forward prices; Financialization; Heterogeneous agents; Uncertainty aversion; Regret (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (14)

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Related works:
Working Paper: Heterogeneous beliefs, regret, and uncertainty: The role of speculation in energy price dynamics (2015)
Working Paper: Heterogeneous Beliefs, Regret, and Uncertainty: The Role of Speculation in Energy Price Dynamics (2013)
Working Paper: Heterogeneous Beliefs, Regret, and Uncertainty: The Role of Speculation in Energy Price Dynamics (2013)
Working Paper: Heterogeneous beliefs, regret, and uncertainty: The role of speculation in energy price dynamics (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:247:y:2015:i:1:p:204-215

DOI: 10.1016/j.ejor.2015.05.061

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