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.

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Energy Economics
Erasmus Research Institute of Management

ter Ellen, S., & Zwinkels, R. (2010). Oil price dynamics: A behavioral finance approach with heterogeneous agents. Energy Economics, 32(6), 1427–1434. doi:10.1016/j.eneco.2010.03.003