The Link between Energy Prices and Stock Markets in European Union Countries

Abstract

The paper illustrates the connection between the energy sector and the stock market, specifically how changes in energy prices, such as oil and gas, influence the returns of the main European stock indices. The analysis was conducted at the level of European Union countries, considering both the specific situation of each state and the case of EU country groups based on different criteria, such as geographical region or industrial development. Even though EU countries share several common economic characteristics, the results of our analysis show that the impact of energy prices on the stock market can differ significantly from one state to another. Another important observation from the results is that energy price dynamics have a different impact on countries with the highest industrial production compared to the rest of the EU countries. From a quantitative perspective, the paper examines both the co-movement between variables and the impact of various shocks. Furthermore, the analysis focuses on the dynamic links between energy and stock markets, employing models such as Dynamic Conditional Correlation and Time-Varying Parameter Vector Autoregressive.

Keywords: energy market, capital market, DCC-GARCH, TVP-VAR