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

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.