قیمت های انرژی، نوسانات، و بازار سهام: شواهدی از منطقه یورو

This paper constitutes a first analysis on stock returns of energy corporations from the Eurozone. It focuses on the relationship between energy market developments and the pricing of European energy stocks. According to our results, oil price hikes negatively impact on stock returns of European utilities. However, they lead to an appreciation of oil and gas stocks. Interestingly, forecastable oil market volatility negatively affects European oil and gas stocks, implying profit opportunities for strategic investors. In contrast, the gas market does not play a role for the pricing of Eurozone energy stocks. Coal price developments affect the stock returns of European utilities. However, this effect is small compared to oil price impacts, although oil is barely used for electricity generation in Europe. This suggests that for the European stock market, the oil price is the main indicator for energy price developments as a whole.

The recent years have been marked by massive price movements at the energy markets. From 2002 to 2007, prices at the respective international exchanges have been rising strongly, and record high prices for oil and natural gas have been accompanied by non-negligible volatility. Energy price, but also price volatility hikes have been shown to be economically detrimental (e.g., Ferderer, 1996 and Sadorsky, 1999). Overall stock market developments are no exception to this rule. Against this background, the recent public attention not only to energy prices, but also to the volatility at the energy markets is not surprising, with oil price volatility being relatively high also compared to volatility of other commodities (Regnier, 2007). This paper constitutes a first analysis on the determinants of stock returns of Eurozone energy corporations. It focuses on the effect of the energy market developments on the stock market. From previous literature it is apparent that the stock market effects of energy price developments may depend on the sectoral affiliation of the respective corporation analyzed. Particularly energy corporations are often said gaining from energy price increase. The role of energy price volatility has not yet been explored in this context. Generally, stock market developments of corporations from the energy branch are very interesting case. This is due to the fact that the sector itself is marked by several peculiarities. Many of the inputs this sector uses and of the outputs it produces are both homogenous and traded at international exchanges. The prices of some of these goods – resources such as oil and gas – are extremely volatile, and the US Dollar is the predominant currency for their trading. Moreover, capital intensity of the industry, compared to other sectors, is high (Sadorsky, 2001). In the light of such possible interactions of different financial markets, it is surprising that there is relatively little literature on the determinants of energy corporations’ stock pricing. Moreover, to our knowledge, for European markets as a whole only studies of Manning (1991) assessing UK oil industry stock portfolios is available. Evidence from continental Europe is completely missing. According to the main result from Manning's research – using a market model plus oil price change for weekly data – a positive effect of oil price changes on oil corporations’ stock returns exists. This effect is largest for corporations purely engaged in oil exploration and production. Faff and Brailsford (1999) analyze the Australian stock market analogously using a model including an “oil factor” besides the well-established market (beta) factor. With respect to the oil and gas sector that is in the focus of our research question, the authors find a positive impact of oil price changes on stock returns on a monthly basis. Most recent and comprehensive research as far as returns of energy stocks are concerned has been conducted for Canada. Sadorsky (2001) develops an extensive model including the market excess return, an interest variable based on the term premium, the change of the Canadian Dollar to US Dollar exchange rate, as well as oil price changes. His estimations show that each of these variables plays a statistically significant role in explaining returns from a stock portfolio of Canadian oil and gas corporations. While the market excess return and the oil price change positively impact on portfolio returns, results of Sadorsky (2001) indicate that increases in both the exchange rate and the term premium lower Canadian oil and gas stock returns. Their results with respect to an estimated beta coefficient smaller than one furthermore suggests that the Canadian oil and gas industry is on average less risky than the market. Similarly focussing on Canadian oil and gas corporations, Boyer and Filion (2007) contribute to these findings in adding gas price changes as a factor of stock returns as well as in incorporating firm-specific financial and operational characteristics (“fundamental factors”) such as cash flows and production volume. As the most surprising result from their analysis based on monthly data, Boyer and Filion find that firm production negatively affects stock returns. As far as the determinants of energy stock returns are concerned, the previous literature is largely restricted to the impact of (amongst others) energy prices. Given the background of negative macroeconomic effects of energy price volatility, and Sadorsky, 2003 finding that even technology stocks seem to be driven by oil price volatility, it is very surprising that the relationship between energy market volatility and energy stocks has, to our knowledge, been ignored so far. In contrast, energy stock returns as well as their volatility may also be influenced by energy market volatility. In this respect, the contribution of this paper is twofold: we conduct a first analysis on the determinants of stock returns of energy corporations from the Eurozone, focussing on the role of the energy market for the stock market. For this purpose, we examine two different portfolios of energy stocks: one portfolio consisting of oil and gas corporations’ and one portfolio comprising utilities’ stocks. Particularly, within our empirical approach, we tackle the issue of relationships between energy market volatility and energy corporations’ stocks. The remainder of this paper is structured as follows: Section 2 presents the background including the main hypotheses for our empirical investigation. Section 3 gives the empirical analysis; Section 4 concludes.

In this paper, we conducted a first analysis on the determinants of Eurozone energy corporations’ stock returns, focussing on the relationship between energy market developments and energy stock pricing. We empirically examined stocks of oil and gas business as well as of utilities, both averaged in respective portfolios. Moreover, we propose a simple approach in order to compute (energy) market volatility and apply it within our analysis. Our results suggest that stock returns of European energy corporations are not only driven by their relationship in systematic risk to the overall stock market. Energy market developments besides variation of other macroeconomic variables play an important role for Eurozone energy stocks. Particularly, we show that both oil price changes and oil price volatility affect oil and gas stocks, with oil prices being positively and oil volatility being negatively related to oil and gas stock returns. In contrast, energy stock returns do not seem to be related to gas market developments. As found in the related literature, average systematic risk of Eurozone energy corporations seems to be smaller than that one of the market. Against the empirical evidence for Canada, the return of the term spread is not negatively related with Eurozone portfolio returns. While both Sadorsky (2001) explains the negative relationship for Canadian energy corporations with high capital intensity of the industry, this does not seem to hold for its European counterpart. Still, the positive effect of the term premium we find for oil and gas corporations is in line with what has been observed for the stock markets of many OECD countries (Hjalmarsson, 2004). Moreover, an appreciation of the Euro against the US Dollar, reflecting an increase in purchasing power of the European corporations on international markets, leads to positive stock market reactions for oil and gas businesses. With respect to the relationship between, on the one hand, resource prices and their volatility, and, on the other hand, the stock market, our results show that Eurozone utilities suffer from negative stock market responses to oil price rises, while oil and gas related businesses are upvalued in such setting. The effect of oil market developments on the stock market is, in the oil and gas portfolio case, not restricted to a linear relationship between price changes at both markets: While the oil price change positively impacts oil and gas stock returns, oil volatility has a negative effect on stock returns. In this respect, our empirical analysis shows that oil and gas stocks strongly react to oil volatility particularly as measured according to the methodology proposed in this paper. The general negative effect of energy volatility on oil and gas corporations’ stocks is, however, robust to alternative constructions of the oil volatility variable. Interestingly, and in contrast to the Canadian experience where there is a stock return sensitivity to a variation in gas prices (although smaller than to oil prices; Boyer and Filion, 2007), the gas market does not seem to play a role for Eurozone energy corporations’ stocks at all. This is especially surprising in the case of electric utilities given the fact that oil, in contrast to gas, is barely used for energy generation in Europe (EIA, 2007). One reason behind this finding could be the fact that a large part of the gas sold in Europe is based on long-term contracts at a price that is determined by a formula that links gas to oil prices in order to prevent from any incentive for fuel switching (cp., e.g., Siliverstovs et al., 2004). Another explanation would be that, consistent with the findings of Haushalter (2000), energy companies hedge more strongly against gas than against oil price risks. Price changes in coal, according to EIA (2007) another important input for electricity generation in Europe, also affect stock returns of utility corporations from the Eurozone. The effect of coal price hikes that imply input cost increases for electricity generators is negative as expected. However, it is significantly smaller than the oil effect, although for European electricity generators coal, compared to oil, is by far the more widely used energy source. In this respect, this analysis suggests that stock market participants primarily use the oil price as the main indicator of energy price developments as a whole. The fact that energy (i.e., oil) market volatility affects the returns of oil and gas stocks, but not of utility stocks, suggests that it is indeed commodity (oil) production reasoning according to Pindyck (2004) that entails stock market reactions. Such reasoning, suggesting that an increase in price volatility that may decrease the production of the respective commodity and possibly lead to profit reductions in the short run (and, due to the discounting of future profits also to a decrease in overall discounted future cash flows), is only relevant to oil and gas corporations, but not to utilities. Given these findings, it is not surprising that during the last years, investments in European oil and gas stock corporations have been very profitable. Besides the generally good market situation, the rise of the Euro against the US Dollar and especially the strong increase of oil prices have promoted this development. In the light of beta coefficients smaller than one as not only found in this analysis, but also in investigations for extra-European energy stocks, investments in oil and gas stocks have also been considered as relatively “conservative”. However, as suggested by the results of our empirical approach, at least European oil and gas stocks may offer a relatively weak performance in times of high oil price volatility. Whether this holds true for extra-European oil and gas stocks as well, may be one direction for future research. In any case, our result that also oil volatility that is forecastable using (relatively simple) autoregressive models indicates that, first, the link between energy and stock markets does not work efficiently, which may indicate that further research in this direction is needed. It, second, suggests that profits can be realized by investors making use of oil volatility forecasting models. According to our results, an investment strategy implying a short position for oil and gas stocks in times of high oil volatility expectations is profitable indeed. However, this result could be further investigated based on, e.g., out-of-sample analysis. As no comprehensive energy corporation-specific database for the Eurozone was available to us, we could not test whether the influence of “fundamental determinants” such as proven reserves and production volumes resembles the effects Boyer and Filion (2007) have found for the Canadian stock market. Moreover, with climate policy getting more and more relevant for (energy) companies, its stock market impact could be analyzed further (cp. Oberndorfer, 2009 or Ziegler et al., 2009). Also, it could be analyzed whether technology stock indices matter for Eurozone energy stocks, as they do for the returns of alternative energy companies (Henriques and Sadorsky, 2008). A further direction for prospective investigations in the field of energy stocks could be the integration of alternative risk factors (e.g., Fama and French, 1993 or Carhart, 1997) into the empirical analysis. Such factors have not been calculated for the European stock market, yet, but are easily available at least for the US and have at least partly proven explanatory power for example for the American (Fama and French, 1993 and Fama and French, 1996) and for the German stock market (Ziegler et al., 2007). In search of parsimonious regression specifications, those factors have been neglected here. So far, it is unexplored whether such approaches may help in explaining Eurozone energy corporations’ stock returns. Also, state-space models or a model with time-varying coefficients, risk premiums and dynamic factor loadings could be investigated in this context. This might provide interesting insights about the dynamics between energy prices and returns of European oil and gas stocks. Useful references for this kind of analysis are, e.g., Han (2006), Jagannathan and Wang (1996) or Lettau and Ludvigson (2001).