andreyrafikov / crude-oil-price-fluctuations

CRUDE-OIL-PRICE-FLUCTUATIONS

The purpose of our research is to investigate the effects of West Texas Intermediate (WTI) crude oil prices on three US energy companies, ExxonMobil (XOM), Chevron Corporation (CVX) and NextEra Energy (NEE). Energy prices play a crucial role in our lives and in several key industries, so we thought it would be relevant to investigate the effects crude oil prices have on a few major energy companies. Our criteria to select the three companies were; US based, listed on the stock market a few years before COVID, have a large market capitalization and to have other revenue sources other than crude oil. Our initial hypothesis is that WTI prices will have a visible effect on the volatility of the chosen companies. Additionally, we are expecting these effects to be larger in the case of ExxonMobil and Chevron, since they are more exposed to crude oil prices, while NextEra has a strong focus on wind, solar and nuclear power. Since our focus is on volatility and not price movements, we expect crude oil prices to have a strong effect on the volatility of NextEra as well, albeit with a negative correlation on the stock price. Our aim is to answer the question whether crude oil prices have any effect on the volatilities of our selected companies. To date, several studies have explored the relationship between crude oil futures and oil company returns, albeit with mixed findings. Some studies have suggested that increased trading activity in crude oil futures markets leads to heightened volatility in oil company stock prices, as investors react to new information and adjust their expectations regarding future oil prices (Gjolberg & Johnsen, 1999). Other research has proposed that the presence of crude oil futures markets serves as a stabilization mechanism, dampening the volatility of oil company returns by providing a platform for hedging and price discovery (Beckmann & Czudaj, 2017),(Sadorsky, 2006). In the literature, various methodologies have been employed to investigate this relationship. Some studies have relied on econometric models such as vector autoregression (VAR) and GARCH models to analyze the volatility spillover effects between crude oil futures and oil 1 company returns. Others have employed event study methodologies to examine the impact of specific events or announcements in the futures markets on oil company volatility. To find the answers to our research question we used several time-series analysis methods, such as four different ARIMA-GARCH models, with structural breaks and crude oil as an exogenous variable, multivariate GARCH models and HAR models.