Abstract
Crude oil is an indispensable resource for the world economy and European Union (EU) countries are strongly dependent on oil imports. In a framework defined by generally positive correlations between oil and stock prices, the paper investigates the relationship between financial companies’ stock prices and crude oil price using a sample of major financial companies headquartered in the EU. The link between stock prices and oil price risk is modelled using a set of macroeconomic variables that includes local stock market indices, the EUR/USD exchange rate, the oil imports dependency, inflation rate, and global volatility indices. We employ panel data as the base econometric model and an ARDL extension that is more appropriated for our research objectives. Our findings show that the EU financial sector is pervasively exposed to oil price changes over the long-run and this exposure is a component of financial companies’ exposure to real economy risk factors, which points towards the key role of the financial sector in the EU economy in transmitting systemic shocks. At the same time, we detect signs of a different behavior of market investors over the short-versus the long-run concerning the valuation of financial companies’ stock prices in relation to oil price and other macroeconomic variables, which raises distressing challenges for financial authorities.
Highlights
Crude oil is considered nowadays the most influential natural resource for the entire world economy
Considering that not all of the series are stationary at level, the use of autoregressive distributed lag (ARDL) model is more than justified as this technique is preferable when dealing with variables that are integrated at different orders [34,44]
Our study investigates the relationship between financial companies’ stock prices and oil price using a sample of 76 financial companies headquartered in European Union (EU) and included in the Forbes 2000
Summary
Crude oil is considered nowadays the most influential natural resource for the entire world economy. It is a critical input for oil consumer countries and a substantial source of revenue for oil supplier countries; any change or shock in the price of oil has the potential to impact the global economy. Based on the assumption that the stocks’ market value represents the sum of the discounted expected future cash flows provided to investors by the issuer of the stock, oil prices influence economic growth, inflation, and overall market expectations of near-term up to long-term volatility, all of them having an indirect effect on the interest rate, which is critical for the discounting of future cash flows. Exchange rate volatility is expected to distress stock returns; for example, when EUR depreciates and USD appreciates, taking into account that American investors own shares
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