IDEAS home Printed from https://ideas.repec.org/p/fem/femwpa/2013.32.html
   My bibliography  Save this paper

Heterogeneous Beliefs, Regret, and Uncertainty: The Role of Speculation in Energy Price Dynamics

Author

Listed:
  • Marc Joëts

    (Ipag Business School and EconomiX-CNRS, University of Paris Ouest, France)

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 extreme fluctuation periods through an original behavioral and emotional approach. To 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 by heterogeneous traders which behave differently depending on the intensity of the price fluctuations and uncertainty context. In particular, energy prices are mainly governed by fundamental and chartist neutral agents during normal times whereas they face to irrational chartist averse investors during extreme fluctuations periods. In this context, the recent energy prices surge can be viewed as the consequence of irrational exhuberance. Our new theoretical model outperforms the random walk in out-of-sample predictive ability.

Suggested Citation

  • Marc Joëts, 2013. "Heterogeneous Beliefs, Regret, and Uncertainty: The Role of Speculation in Energy Price Dynamics," Working Papers 2013.32, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2013.32
    as

    Download full text from publisher

    File URL: http://www.feem.it/userfiles/attach/20134161514364NDL2013-032.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Stefan Reitz & Frank Westerhoff, 2007. "Commodity price cycles and heterogeneous speculators: a STAR–GARCH model," Empirical Economics, Springer, vol. 33(2), pages 231-244, September.
    2. Lisa A. Kramer & Mark J. Kamstra & Maurice D. Levi, 2000. "Losing Sleep at the Market: The Daylight Saving Anomaly," American Economic Review, American Economic Association, vol. 90(4), pages 1005-1011, September.
    3. Ron Alquist & Lutz Kilian, 2010. "What do we learn from the price of crude oil futures?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 539-573.
    4. Moosa, Imad A. & Al-Loughani, Nabeel E., 1994. "Unbiasedness and time varying risk premia in the crude oil futures market," Energy Economics, Elsevier, vol. 16(2), pages 99-105, April.
    5. Chiou, Jer-Shiou & Lee, Yen-Hsien, 2009. "Jump dynamics and volatility: Oil and the stock markets," Energy, Elsevier, vol. 34(6), pages 788-796.
    6. Gj[empty set]lberg, Ole, 1985. "Is the spot market for oil products efficient? : Some rotterdam evidence," Energy Economics, Elsevier, vol. 7(4), pages 231-236, October.
    7. Yin-Wong Cheung & Menzie D. Chinn & Ian W. Marsh, 2004. "How do UK-based foreign exchange dealers think their market operates?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 289-306.
    8. Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva, 2013. "The Role of Speculation in Oil Markets: What Have We Learned So Far?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    9. Creti, Anna & Joëts, Marc & Mignon, Valérie, 2013. "On the links between stock and commodity markets' volatility," Energy Economics, Elsevier, pages 16-28.
    10. West, Kenneth D, 1996. "Asymptotic Inference about Predictive Ability," Econometrica, Econometric Society, vol. 64(5), pages 1067-1084, September.
    11. Westerhoff, Frank & Reitz, Stefan, 2005. "Commodity price dynamics and the nonlinear market impact of technical traders: empirical evidence for the US corn market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 349(3), pages 641-648.
    12. David Hirshleifer & Tyler Shumway, 2003. "Good Day Sunshine: Stock Returns and the Weather," Journal of Finance, American Finance Association, vol. 58(3), pages 1009-1032, June.
    13. Hammoudeh, Shawkat & Dibooglu, Sel & Aleisa, Eisa, 2004. "Relationships among U.S. oil prices and oil industry equity indices," International Review of Economics & Finance, Elsevier, vol. 13(4), pages 427-453.
    14. repec:dau:papers:123456789/14980 is not listed on IDEAS
    15. Saunders, Edward M, Jr, 1993. "Stock Prices and Wall Street Weather," American Economic Review, American Economic Association, vol. 83(5), pages 1337-1345, December.
    16. Ellen, Saskia ter & Zwinkels, Remco C.J., 2010. "Oil price dynamics: A behavioral finance approach with heterogeneous agents," Energy Economics, Elsevier, vol. 32(6), pages 1427-1434, November.
    17. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-824, December.
    18. Boswijk, H. Peter & Hommes, Cars H. & Manzan, Sebastiano, 2007. "Behavioral heterogeneity in stock prices," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 1938-1970, June.
    19. Lutz Kilian, 2008. "Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Matter for the U.S. Economy?," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 216-240, May.
    20. He, Xue-Zhong & Westerhoff, Frank H., 2005. "Commodity markets, price limiters and speculative price dynamics," Journal of Economic Dynamics and Control, Elsevier, pages 1577-1596.
    21. M. J. Lombardi & I. Van Robays, 2011. "Do Financial Investors Destabilize the Oil Price?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/760, Ghent University, Faculty of Economics and Business Administration.
    22. Silvennoinen, Annastiina & Thorp, Susan, 2013. "Financialization, crisis and commodity correlation dynamics," Journal of International Financial Markets, Institutions and Money, Elsevier, pages 42-65.
    23. Lutz Kilian & Daniel P. Murphy, 2012. "Why Agnostic Sign Restrictions Are Not Enough: Understanding The Dynamics Of Oil Market Var Models," Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 1166-1188, October.
    24. Christiane Baumeister & Lutz Kilian, 2011. "Real-Time Forecasts of the Real Price of Oil," Journal of Business & Economic Statistics, Taylor & Francis Journals, pages 326-336.
    25. Mark J. Kamstra & Lisa A. Kramer & Maurice D. Levi, 2003. "Winter Blues: A SAD Stock Market Cycle," American Economic Review, American Economic Association, pages 324-343.
    26. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
    27. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    28. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
    29. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    30. Sadorsky, Perry, 1999. "Oil price shocks and stock market activity," Energy Economics, Elsevier, vol. 21(5), pages 449-469, October.
    31. Lorenzo Garlappi & Raman Uppal & Tan Wang, 2007. "Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach," Review of Financial Studies, Society for Financial Studies, pages 41-81.
    32. Choi, Kyongwook & Hammoudeh, Shawkat, 2010. "Volatility behavior of oil, industrial commodity and stock markets in a regime-switching environment," Energy Policy, Elsevier, vol. 38(8), pages 4388-4399, August.
    33. Dowling, Michael & Lucey, Brian M., 2008. "Robust global mood influences in equity pricing," Journal of Multinational Financial Management, Elsevier, vol. 18(2), pages 145-164, April.
    34. Chao, John & Corradi, Valentina & Swanson, Norman R., 2001. "Out-Of-Sample Tests For Granger Causality," Macroeconomic Dynamics, Cambridge University Press, vol. 5(04), pages 598-620, September.
    35. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
    36. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
    37. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 195-213, October.
    38. Alan Kirman, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 137-156.
    39. Luciana Juvenal & Ivan Petrella, 2015. "Speculation in the Oil Market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(4), pages 621-649, June.
    40. repec:taf:jnlbes:v:30:y:2012:i:2:p:326-336 is not listed on IDEAS
    41. Mc Cracken, Michael W., 2000. "Robust out-of-sample inference," Journal of Econometrics, Elsevier, vol. 99(2), pages 195-223, December.
    42. de Jong, Eelke & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2009. "Behavioural heterogeneity and shift-contagion: Evidence from the Asian crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 33(11), pages 1929-1944, November.
    43. Brian M. Lucey & Michael Dowling, 2005. "The Role of Feelings in Investor Decision-Making," Journal of Economic Surveys, Wiley Blackwell, vol. 19(2), pages 211-237, April.
    44. Filis, George & Degiannakis, Stavros & Floros, Christos, 2011. "Dynamic correlation between stock market and oil prices: The case of oil-importing and oil-exporting countries," International Review of Financial Analysis, Elsevier, vol. 20(3), pages 152-164, June.
    45. Hooker, Mark A., 1996. "This is what happened to the oil price-macroeconomy relationship: Reply," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 221-222, October.
    46. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
    47. Lutz Kilian & Daniel P. Murphy, 2014. "The Role Of Inventories And Speculative Trading In The Global Market For Crude Oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(3), pages 454-478, April.
    48. Corradi, Valentina & Swanson, Norman R. & Olivetti, Claudia, 2001. "Predictive ability with cointegrated variables," Journal of Econometrics, Elsevier, vol. 104(2), pages 315-358, September.
    49. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-588, August.
    50. Stefan Reitz & Ulf Slopek, 2009. "Non-Linear Oil Price Dynamics: A Tale of Heterogeneous Speculators?," German Economic Review, Verein für Socialpolitik, vol. 10, pages 270-283, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Joëts, Marc, 2014. "Energy price transmissions during extreme movements," Economic Modelling, Elsevier, vol. 40(C), pages 392-399.
    2. repec:ipg:wpaper:2014-569 is not listed on IDEAS
    3. repec:ipg:wpaper:2014-443 is not listed on IDEAS
    4. repec:ipg:wpaper:2014-449 is not listed on IDEAS
    5. repec:ipg:wpaper:2014-518 is not listed on IDEAS
    6. repec:ipg:wpaper:2014-546 is not listed on IDEAS
    7. repec:ipg:wpaper:2014-565 is not listed on IDEAS
    8. repec:ipg:wpaper:2014-455 is not listed on IDEAS
    9. repec:ipg:wpaper:2014-495 is not listed on IDEAS
    10. repec:ipg:wpaper:2014-535 is not listed on IDEAS
    11. repec:ipg:wpaper:2014-441 is not listed on IDEAS
    12. Marc Joëts, 2013. "Energy price transmissions during extreme movements," Working Papers 2013-28, Department of Research, Ipag Business School.
    13. repec:ipg:wpaper:2014-481 is not listed on IDEAS
    14. repec:ipg:wpaper:2014-442 is not listed on IDEAS
    15. repec:ipg:wpaper:2014-547 is not listed on IDEAS
    16. repec:ipg:wpaper:2014-502 is not listed on IDEAS
    17. repec:ipg:wpaper:2014-583 is not listed on IDEAS
    18. repec:ipg:wpaper:2014-456 is not listed on IDEAS
    19. repec:ipg:wpaper:2014-549 is not listed on IDEAS
    20. repec:ipg:wpaper:2014-486 is not listed on IDEAS
    21. repec:ipg:wpaper:2014-545 is not listed on IDEAS
    22. repec:ipg:wpaper:2014-523 is not listed on IDEAS

    More about this item

    Keywords

    Energy Forward Prices; Financialization; Heterogeneous Agents; Uncertainty Aversion; Regret;

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fem:femwpa:2013.32. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (barbara racah). General contact details of provider: http://edirc.repec.org/data/feemmit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.