Financial Industry and Oil Price Volatility: An Analysis on Central and Eastern Europe

The global economy is considerably dependent on fossil fuels, of which oil is by far the most important, and concerns about the impact of oil price volatility on the real economy have been recently fuelled by the positive correlation between oil and stock prices. This positive correlation might be explained by a joint response of both oil and stock prices to underlying shifts in global demand. In other words, a possible explanation for this positive correlation might be the tendency of stock prices and crude oil prices to react in the same way to common factors, such as changes in aggregate demand or in overall uncertainty and risk aversion. The financial industry seems to be a transmitter channel of macroeconomic and even global risks towards the remaining industries, as indicated by the existing literature and the recent global financial crisis, which raises the interest towards a thorough investigation of the financial industry exposure to risk factors. Our paper proposes an empirical research on the exposure to oil price risk of companies from the financial industry listed on stock exchanges from seven Central and Eastern European countries: Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania and Slovenia. The Central and Eastern Europe countries are interesting for research on our topic given their high levels of energy intensity, their significant share of petroleum products in total final energy consumption and their high oil imports dependency rates—i.e. the percentage of oil imports in net available energy. We use daily prices and returns of listed companies from the financial industry, as well as Brent crude oil prices, to estimate a two-stage GARCH (1,1) to capture the effects of temporal dependence in oil prices volatility on financial industry firms’ returns. The GARCH model is complemented by Granger causality tests to further explore the relationship between stock and oil prices. The time span of our research is January 2010–December 2019. Our results show that the relationship between stock prices and oil price volatility is significant in the CEE region, which reinforces the fundamental role of the financial industry as transmitter of economic shocks towards the real economy.