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

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  • Marc Joëts

Abstract

This paper proposes to investigate the impact of ?nancialization on energy markets (oil, gas, coal, and electricity European forward prices) during both normal times and periods of extreme ?uctuation through an original behavioral and emotional approach. With this aim, we propose a new theoretical and empirical framework based on a hetero- geneous agents model in which fundamentalists and chartists co-exist and are subject to regret and uncertainty. We ?nd signi?cant evidence that energy markets are composed of heterogeneous traders who be- have di¤erently, depending on the intensity of the price ?uctuations and the uncertainty context. In particular, energy prices are mainly governed by fundamental and chartist neutral agents during normal times, whereas they face irrational chartist averse investors during pe- riods of extreme ?uctuations. In this context, the recent surge in energy prices can be viewed as the consequence of irrational exhuberance. Our new theoretical model outperforms the random walk in out-of-sample predictive ability.

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Bibliographic Info

Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2013-031.

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Length: 39 pages
Date of creation: 15 Oct 2013
Date of revision:
Handle: RePEc:ipg:wpaper:2013-031

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Keywords: Energy forward prices; ?nancialization; heterogeneous agents; uncertainty aversion; regret.;

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