Mood-Misattribution Effect on Energy Finance: A Biorhythm Approach

Purpose – The purpose of this chapter is to investigate the relationship between emotion and European energy forward prices of oil, gas, coal and electricity during normal times and periods of extreme price movements. Methodology/Approach – We use a biorhythm approach characterized by the seasonal affective disorder (SAD) variable to study the impact of emotion on energy markets. Normal times and periods of extreme price movements are approximated by OLS and quantile estimations, respectively. Findings – We use European energy forward prices of oil, gas, coal, and electricity. European equity future index (Dow Jones Euro Stoxx 50) and euro/dollar US exchange rate are used as control variables for economic and financial environment. Estimating OLS and quantile regressions, we find that seasonal patterns have a significant impact during extreme volatility periods only. Further investigations reveal that the SAD effect is significant during periods of price decrease, but insignificant during price increase times. The out-of-sample predictive ability properties show that our “SAD model” outperforms significantly the pure “macroeconomic” one. Originality/Value of chapter – This topic is novel in energy finance since I use psychological background theory to understand energy price dynamics. I illustrate the relevance of our approach by comparing the out-of-sample predictive ability of our model against macroeconomic one. My results could be considered to improve energy porfolio allocation.