Exploring the interplay between eurozone electricity sector stocks, real interest rates and inflation expectations

Carlos Esparcia, Francisco Jareño and Eliseo Navarro

International Review of Economics & Finance, 2025, vol. 101, issue C

Abstract: This paper examines the relationship between Eurozone electricity sector portfolios and interest rate changes from 2019 to 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.

Keywords: Duration; European electricity market; Interest rates; Expected inflation rates; Quantile regression; Inflation-linked swaps (search for similar items in EconPapers)
JEL-codes: C21 G12 G32 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056025004150
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:101:y:2025:i:c:s1059056025004150

DOI: 10.1016/j.iref.2025.104252

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().