Oil price risk in the Eurozone: a sectoral analysis

Abstract

This study investigates how oil price movements impact the main Eurozone industry supersectors returns. We use a multifactor market model in which we incorporate oil price changes as an additional risk factor. In order to account for possible breaks in the relationship, we use the Bai and Perron (1998, 2003) breakpoints identification methodology. We find evidence of the presence of structural instabilities on the relationship between sector stock returns and oil price changes. Different breakpoints are identified, particularly the 2003 Iraq invasion year, the 2008 subprime crisis and the 2012 Euro debt crisis. Moreover, our results prove that stock return sensitivities to oil prices are time varying and sector dependent. Besides, the subprime financial crisis appears to induce a significantly positive effect on the oil-stock market nexus. However, the Euro debt crisis has a mostly negative effect. The other identified breakpoints do not seem to have any significant effect on the oil stock market nexus.

Further insights into the oil and equity market relationship

“…The presence of this breakpoint is predictable because this crisis has altered Eurozone’s growth, financial stability and solidity. This result is consistent with Belhassine and Ben Bouzid (2017), who report the presence of this breakpoint in the Eurozone.…”

“…Finally, for food and beverages, the already observed positive effect of oil price shocks has strengthened after 2008. This positive effect of the GFC is in accordance with prior studies (Broadstock et al , 2012; Mollick and Assefa, 2013; Zhu et al , 2014; Tsai, 2015; Belhassine and Ben Bouzid, 2017; You et al , 2017).…”

“…On the other hand, crude oil price movements attracted considerable attention throughout 2008 as they witnessed the bursting of a bubble. The 2008 breakpoint in the oil-stock market relationship is also reported in previous studies (Fan and Xu, 2011; Broadstock et al , 2012; Li et al , 2012; Moya-Martínez et al , 2014; Belhassine and Ben Bouzid, 2017).…”

“…It shows that all supersectors exhibit at least one breakpoint. While break-dates are not the same for all supersectors, they can be grouped into four generic dates, most of which are consistent with those identified by Belhassine and Ben Bouzid (2017) [6]. Results reveal the particular presence of structural change for the majority of sectors coinciding with the GFC and the EDC, suggesting that both the crises induced a significant change in the oil-stock market nexus in the Eurozone, as expected.…”

“…Several recent papers document that another important feature of the oil-stock market relationship is that it is not stable over time. They find evidence supporting the presence of several breakpoints (Fan and Xu, 2011; Lee et al , 2012; Belhassine and Ben Bouzid, 2017). More specifically, financial turmoil and crises can induce a complete turnaround in the oil-stock market relationship.…”