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

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  • Marc Joëts

    (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

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.

Suggested Citation

  • Marc Joëts, 2015. "Heterogeneous beliefs, regret, and uncertainty: The role of speculation in energy price dynamics," Post-Print hal-01609889, HAL.
  • Handle: RePEc:hal:journl:hal-01609889
    DOI: 10.1016/j.ejor.2015.05.061
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01609889
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    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

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