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

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 extreme ‡uctuation 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 …nd signi…cant evidence that energy markets are composed by heterogeneous traders which behave di¤erently depending on the intensity of the price ‡uctuations 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 ‡uctuations 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. JEL Classi…cation: Q43, G15, G02, D81 Keywords: Energy forward prices, …nancialization, heterogeneous agents, uncertainty aversion, regret. I am very grateful to Anna Cretì, Valérie Mignon and Tovonony Raza…ndrabe for their constructive comments and suggestions that help to improve an earlier version of the paper. Usual disclaimers apply. yIpag Business School and EconomiX-CNRS, University of Paris Ouest, France. Email: [email protected]