Returns and Volatility of Eurozone Energy Stocks

The recent years have been marked by massive price movements at the energy markets. Oil prices at the international energy exchanges have been rising strongly, and record high prices for oil and gas have been accompanied by non-negligible volatility. Resource price, but also resource price volatility hikes have been shown to be economically detrimental. In contrast to the overall stock market, energy stocks seem to be an exemption to this rule: Previous research suggests that energy corporations are gaining from resource price increases.
Up to now, there is no literature on European energy stocks available. Moreover, the existing research exclusively relates to determinants of stock returns, while the return volatility of energy stocks is widely unexplored. Both energy stock returns and volatility may not only be driven by price changes at other financial markets, but also by the respective volatility and particularly by energy market volatility. This has not been analyzed, yet. Our results suggest that stock returns of European energy corporations are not only determined by their relationship in systematic risk to the overall stock market. Particularly, Eurozone utilities on average suffer from negative stock market responses to oil price rises, while oil and gas related businesses are upvalued in such setting. Both utility and oil and gas stocks are affected by exchange rate fluctuations. Oil market volatility negatively impacts on oil and gas stocks. In contrast, energy stock volatility is not related to volatility of the resource market, but only driven by its own dynamics. Generally, the gas market does not seem to play a role for Eurozone energy corporations' stock performance. 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. Therefore, traders seem to consider the oil price as main indicator for energy price developments as a whole.
Our findings offer an explanation for the profitability of investments in European oil and gas stock corporations during recent years. Besides the generally good market situation, the rise of the Euro against the U.S. Dollar and especially the strong increase of oil prices have promoted this development. Investments in oil and gas stocks have also been considered as relatively "conservative". However, as suggested by the results of our empirical investigation, at least European oil and gas stocks may offer a relatively weak performance in times of high oil price volatility.

Oberndorfer, Ulrich (2008), Returns and Volatility of Eurozone Energy Stocks, ZEW Discussion Paper No. 08-017, Mannheim.