Oil Price and Stock Prices of EU Financial Companies: Evidence from Panel Data Modeling

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.