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Can energy security predict energy stock returns?

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  • Iyke, Bernard Njindan
  • Tran, Vuong Thao
  • Narayan, Paresh Kumar

Abstract

We hypothesize that energy security contains valuable information that can predict energy stock returns. To test this hypothesis, we construct 10 energy security indexes and nine energy stock returns. We find that, at most, all 10 energy security indexes can predict returns. We further show that the return forecasts generated using the energy security indexes as a predictor are economically significant. A mean-variance investor is willing to pay a maximum of 4.88% per annum in extra portfolio management fees to access the additional information contained in return forecasts generated using the energy security indexes. These findings survive several robustness tests.

Suggested Citation

  • Iyke, Bernard Njindan & Tran, Vuong Thao & Narayan, Paresh Kumar, 2021. "Can energy security predict energy stock returns?," Energy Economics, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:eneeco:v:94:y:2021:i:c:s0140988320303923
    DOI: 10.1016/j.eneco.2020.105052
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    Cited by:

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    2. Gu, Leilei & Liu, Zhongyang & Xu, Danyang, 2023. "The risk-mitigating role of corporate social responsibility in Chinese listed heavy-polluting companies: An extreme event experience perspective," Energy Economics, Elsevier, vol. 125(C).
    3. Li, Mengzhe & Lin, Qianru & Lan, Fei & Zhan, Zhimin & He, Zhongshi, 2023. "Trade policy uncertainty and financial investment: Evidence from Chinese energy firms," Energy Economics, Elsevier, vol. 117(C).
    4. Iyke, Bernard Njindan, 2024. "Climate change, energy security risk, and clean energy investment," Energy Economics, Elsevier, vol. 129(C).
    5. Yin, Zhichao & Wang, Rui & Wu, Xi, 2023. "Financial inclusion, natural disasters and energy poverty: Evidence from China," Energy Economics, Elsevier, vol. 126(C).
    6. Lee, Chien-Chiang & Yuan, Zihao & He, Zhi-Wen & Xiao, Fu, 2024. "Do geopolitical risks always harm energy security? Their non-linear effects and mechanism," Energy Economics, Elsevier, vol. 129(C).
    7. Lee, Chien-Chiang & Wang, Chang-song, 2022. "Financial development, technological innovation and energy security: Evidence from Chinese provincial experience," Energy Economics, Elsevier, vol. 112(C).
    8. Zhen Yu & Jinpo Li & Ge Yang, 2021. "A Review of Energy Security Index Dimensions and Organization," Energy RESEARCH LETTERS, Asia-Pacific Applied Economics Association, vol. 3(Early Vie), pages 1-5.
    9. Yurii Kharazishvili & Aleksy Kwilinski & Oleksandr Sukhodolia & Henryk Dzwigol & Dmytro Bobro & Janusz Kotowicz, 2021. "The Systemic Approach for Estimating and Strategizing Energy Security: The Case of Ukraine," Energies, MDPI, vol. 14(8), pages 1-30, April.
    10. Qiu, Hua & Sha, Yezhou & Zhang, Yixing, 2024. "Energy affordability and subjective well-being in China: Causal inference, heterogeneity, and the mediating role of disaster risk," Energy Economics, Elsevier, vol. 129(C).
    11. Zhu, Bo & Deng, Yuanyue & Hu, Xin, 2023. "Global energy security: Do internal and external risk spillovers matter? A multilayer network method," Energy Economics, Elsevier, vol. 126(C).
    12. Zhu, Bo & Deng, Yuanyue & Lin, Renda & Hu, Xin & Chen, Pingshe, 2022. "Energy security: Does systemic risk spillover matter? Evidence from China," Energy Economics, Elsevier, vol. 114(C).

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    More about this item

    Keywords

    Stock returns; Energy stocks; Energy security; Economic significance; Predictability;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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