Lost in Transmission?Stock Market Impacts of the 2006 European Gas Crisis

Ulrich Oberndorfer, ZEW*Dirk Ulbricht, Ifo Institute

Janina Ketterer, Ifo Institute

*Centre for European Economic Research (ZEW)Department of Environmental and Resource Economics, Environmental Management

oberndorfer@zew.de

Agenda

Motivation: The 2006 European Gas Crisis

Empirical Approach

Data

Results

Conclusions

Ulrich Oberndorfer – Lost in Transmission? (2)

Motivation: The 2006 European Gas Crisis

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The 2006 European Gas Crisis

2005: Russo-Ukrainian dispute concerning discount on gas deliveries

20% of West European gas demand supplied by Russia and transmitted via the Ukraine

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The 2006 European Gas Crisis

December 27, 2005: Announcement of Russian freezing of natural gas transmission to the Ukraine

January 1, 2006: Suspension of deliveries

January 2, 2006: Cutback in Europe up to 33 per cent, rise of resource and electricity prices

January 3, 2006: Russia turns supply back on

Energy supply security of Western Europe at risk!

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Empirical Approach & Data

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Empirical Approach: Hypotheses

damage of business prospects or windfall profits: abnormal returns for energy-related companies?

risk & uncertainty implications: volatility effect of stock returns?

important: distinct analysis of announcement, crisis, withdrawal

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Empirical Approach: Event Study

perfect set-up for event study approach

financial market effects of unanticipated event

interpretation: effect on value of corporations

1st event study in environmental and resource economicsconsidering (event-induced) volatility

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Event Study Approach: Volatility

Event-induced abnormal unsystematic volatility(Hilliard & Savickas, 2003)

GARCH (1,1)-framework:

(1)

with

(2)

: return of asset i at time t: return of the market portfolio at time t

titmiiti rr ,,, εβα ++=

21,1,, −− ++= tiitiiiti chbah ε

tir ,

( )titi hN ,, ,0~ε

tmr ,

mean equation(one-factor model)

variance equation(„volatility clustering“)

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Event Study Approach: VolatilityGARCH (1,1)-framework:

(1) with

(2)

(3)

Null hypothesis: no abnormal volatilityIntuition: security vs. event specific factors

titmiiti rr ,,, εβα ++=2

1,1,, −− ++= tiitiiiti chbah ε

( )1=tλ

( )titi hN ,, ,0~ε

∑∑

∑=

=

=

+−

⎟⎟⎠

⎞⎜⎜⎝

⎛−

−=

N

iN

jtiti

N

jtjti

t

hN

hN

NN

N 1

1,2,

2

1,,

ˆ1ˆ2

ˆ1ˆ

11ˆ

εελ

cross-sectional variance of resid. (including event-specific factors)systematic counterpart(volatility dynamics only)

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Event Study Approach: Returns

Abnormal performance under conditions of event-inducedvolatility (Savickas, 2003)

GARCH (1,1)-framework:

(4) with

(5)

: dummy variable equalling „1“ for an event day / period t

Null hypothesis: no effect; size of event effect:

tititmiiti Drr ,,, εγβα +++=

titiitiiiti Ddchbah +++= −−2

1,1,, ε

( )titi hN ,, ,0~ε

tD

∑=

N

iiN 1

ˆ1 γ

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Event Study Approach: Returns

GARCH (1,1)-framework:

(4) with

(5)

(6) with

tititmiiti Drr ,,, εγβα +++=

titiitiiiti Ddchbah +++= −−2

1,1,, ε

( )titi hN ,, ,0~ε

∑ ∑

∑

= =

=

⎟⎟⎠

⎞⎜⎜⎝

⎛−

−

=N

i

N

j

tjti

N

i

ti

t

NS

SNN

NS

1

2

1

,,

1

,

)1(1

θti

iti

hS

,

, ˆγ̂

=

Intuition: cross-sectional test statistic making use of a refinement ofthe usual t-statistic

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Data

financial market return data on daily basis

energy-related corporations: Dow Jones Stoxx 600 Utilities, Dow Jones Stoxx 600 Oil & Gas

sample of 58 firms - 280 observations each

market return: calculated from Dow Jones Stoxx 50

3 „event windows“: announcement phase (Dec. 28 – 30), crisisday (Jan. 2), withdrawal phase (Jan. 3 – 5)

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Results & Conclusions

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Results: Abnormal Volatility

-57,33 -6,00

21,67

-60,00-50,00-40,00-30,00-20,00-10,00

0,0010,0020,0030,00

in %

announcement phase:28.-30.12.05

crisis day: 02.01.2006 withdrawal phase: 03.-05.01.06

Abnormal unsystematic volatility(daily average; full sample)

crisis withdrawal induces volatility shock!

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Results: Abnormal Volatility

highly significant volatility increase(73%) on January 3

effect robust for subsamples (utilities / oil & gas)

significant (5%-level) impact for whole withdrawal-phase(Jan. 3- 5)

Abnormal unsystematic volatility(full sample)

28.12.200529.12.2005

30.12.2005

02.01.2006

03.01.2006

04.01.200605.01.2006

-80,00

-60,00

-40,00

-20,00

0,00

20,00

40,00

60,00

80,00

100,00

in %

crisis withdrawal boosts energy corporations’ risk!

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Results: Abnormal Returns

theta (t)(test statistic)

-1,5

-1

-0,5

0

0,5

1

1,5

2

2,5

3

announcement phase: 28.-30.12.05

crisis day: 02.01.2006 w ithdraw al phase: 03.-05.01.06

t-di

str.

(N-1

)

crisis announcement positively affects energy stocks!

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Results: Abnormal Returns

significant (5%-level) positive abnormal returns in the announcement period

modest average impact (0.14%)

effect especially strong on December 28 and for oil & gas corporations (0.56%)

no significant impact for crisis day and withdrawal-phase

theta (t)(test statistic)

-2

-1

0

1

2

3

4

5

28.12

.2005

29.12

.2005

30.12

.2005

31.12

.2005

01.01

.2006

02.01

.2006

03.01

.2006

04.01

.2006

05.01

.2006

t-dis

tr. (N

-1)

crisis announcement increases market expectations vis-à-vis energy corporations!

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Results: Summary

definite announcement of crisis increases market expectationswith respect to energy-related firms

volatility shock when Russia reopens its valves

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Conclusions

windfall profits due to electricity/resource price increases:upvaluation of resource stocks and depositssources of energy production other than oil/gas availablecrisis as opportunity for raising mark-ups

expectations vis-à-vis future energy policy

crisis withdrawal with potential for energy price drop:risk for energy-related corporationsvolatility matters!

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Thank You!

oberndorfer@zew.deUlrich Oberndorfer – Lost in Transmission? (21)