The link between energy prices and stock markets in European Union countries

• Study Focus: • Examines oil and gas price impacts on EU stock markets, noting regional variations. • Analyzes differences across industrial sectors and geographical regions. • Methodology: • Uses DCC-GARCH and TVP-VAR models to track energy-stock market relationships. • Employs Markov Switching Model to identify correlation regime changes. • Analyzes daily and quarterly data from 2010-2023. • Classifies EU countries by region and industrial development level. • Correlation Patterns: • EU markets correlate more strongly with oil prices than with gas prices. • Geopolitical events create significant turning points in correlations. • Eastern European markets showed strongest negative gas price correlation post-Ukraine. • Markov Switching Model Results: • Identifies distinct high and low correlation regimes between energy and markets. • Shows strong persistence with 98% probability of remaining in same regime. • Demonstrates stability in relationships before transitioning to different regimes. • Regional Differences: • More industrialized EU countries show stronger oil price correlations. • Northern Europe correlates more with gas. • Southern/Western more with oil. • Impact of Geopolitical Events: • Russia-Ukraine conflicts act as correlation turning points. • Countries near conflict zones experience stronger negative gas price correlations. • Energy Price Shocks: • Oil and gas shocks primarily affect markets in short to medium term. • Shock sensitivity peaked during COVID-19 and Ukraine war periods. • Additional Insights: • Correlation regimes remain stable for extended periods before changing. • Dynamic modeling proves essential for capturing time-varying relationships. • Main Conclusions: • Energy-market relationships vary by energy type, location, and development level. • Geopolitical events significantly alter correlations and increase market volatility. The paper examines the relationship between the energy sector and the stock market, specifically analyzing how fluctuations in energy prices, such as oil and gas, influence the returns of major European stock indices. The analysis is conducted at the level of European Union (EU) countries, considering both individual country-specific dynamics and group-level effects based on various criteria, such as geographical region and industrial development. Although EU countries share several common economic characteristics, the findings indicate that the impact of energy prices on stock markets varies significantly across states. Additionally, the results highlight that energy price dynamics affect countries with the highest levels of industrial production differently compared to the rest of the EU. From a quantitative perspective, the study explores both the co-movement between variables and the effects of various economic shocks. Furthermore, it examines the dynamic linkages between energy and stock markets by employing models such as the Dynamic Conditional Correlation (DCC) model, the Time-Varying Parameter Vector Autoregressive (TVP-VAR) model, and the Markov-Switching model to capture regime-dependent changes in the relationship between energy prices and stock market returns.