Oil price dynamics: A behavioral finance approach with heterogeneous agents

Saskia ter Ellen, Remco C J Zwinkels*

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

In this paper, we develop and test a heterogeneous agent model for the oil market. The demand for oil is divided in a speculative component and a real component. Speculators are boundedly rational in forming price expectations. Expectations are formed by one of two boundedly rational rules of thumb: fundamentalist and chartist. While fundamentalists trade on mean-reversion, chartists follow the trend in prices. Speculators then choose between these rules based on past profitability. Estimation results on Brent and WTI oil reveal that both groups are active in the oil market, and that speculators often switch between the groups. The model outperforms both the random walk and VAR models in out-of-sample forecasting.

Original languageEnglish
Pages (from-to)1427-1434
Number of pages8
JournalEnergy Economics
Volume32
Issue number6
DOIs
Publication statusPublished - Nov 2010

Keywords

  • Behavioral finance
  • Fundamentalists and chartists
  • Oil price

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