Exploring the interplay between eurozone electricity sector stocks, real interest rates and inflation expectations
Year: 2025
Type: article
Abstract: This paper examines the relationship between Eurozone electricity sector portfolios and interest rate changes from 2019-2022 using quantile regression. We distinguish between changes in nominal interest rates caused by changes in real interest rates and those caused by changes in expected inflation. A new feature is the used of inflation-linked swaps to measure inflation expectations. This decomposition provides a richer view of how variations in nominal interest rates affect electricity portfolios. It indicates that real rate changes significantly impact electricity stock returns, while nominal rate changes due to variations in inflation expectations have a smaller effect. The research splits the sample period into two subperiods: a stable period (2019-2020) and a volatile period (2021-2022). Note that an initial training period to calibrate the electricity portfolio optimization approach (January 2015 - December 2018) is also included. We also distinguish between companies based on their debt levels. Our findings support the hypothesis that the European electricity sector is significantly exposed to interest rate changes, with notable differences depending on companies leverage. The impact of interest rate changes on electricity portfolio returns is more pronounced during extreme market conditions, such as bearish market states. However, quantile regression analysis suggests that in certain scenarios, electricity companies can pass on some inflationary shocks to their product prices, particularly during bullish market states.
Institutions: University of Castilla-La Mancha, Universidad de Alcalá
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $1,930
OpenAlex ID: W4411049920