The Shifting Dynamics of Energy Supply Shocks: Natural Gas as the New Driver of European Stock Market Volatility

Zhangying Li (), O-Chia Chuang () and Rangan Gupta ()
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Zhangying Li: Economics and Management School, Wuhan University
O-Chia Chuang: School of Digital Economics, Hubei University of Economics
Rangan Gupta: Department of Economics, University of Pretoria

No 202609, Working Papers from University of Pretoria, Department of Economics

Abstract: The onset of the Russia-Ukraine war in 2022 caused significant fluctuations in global energy markets, particularly in natural gas prices, highlighting the growing importance of natural gas for financial market stability. Using a structural econometric framework, we analyze the dynamic effects of natural gas supply shocks compared to three distinct oil shocks popularly used in the energy economics literature using constant and time-varying parameter local projections model, and associated historical decomposition. Our findings reveal that supply shocks of natural gas has replaced oil as the primary driver of stock market volatility, particularly during the 2022 energy crisis. Additionally, natural gas supply shocks are found to perform better in an out-of-sample forecasting exercise compared to oil supply shocks. These results suggest the need for policymakers and investors to incorporate natural gas price dynamics into financial risk management frameworks for Europe.

Keywords: Natural Gas Price Supply Shocks; Oil price Supply Shocks; Stock Price Volatility; Local Projection; Forecasting (search for similar items in EconPapers)
Pages: 19 pages
Date: 2026-04
New Economics Papers: this item is included in nep-cis, nep-eec and nep-ene
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