Investigation of energy price volatility effect on stock returns of Borsa Istanbul firms

Energy markets are one of the most important factors of a country's economic and social development. As with all aspects of life, energy is widely used in many economic sectors such as agriculture, manufacturing, transport, public services. Energy prices affect the overall production costs of a company. It is assumed that the change in production costs affects companies' share prices. Electrical energy, one of the secondary energy sources, and coal energy, one of the primary energy sources, are both included in this study. The manufacturing industry is selected for the study because it is one of the sectors with the largest share in energy consumption. In this study, the effects of coal and electricity price volatility on manufacturing sector share indices are investigated. Sample of the study spans from January 2009 to December 2020. In this study, volatility in electricity and coal prices are modeled with ARCH (Autoregressive Conditional Heteroskedasticity) class models. In the regression model including the BIST manufacturing sector index returns, it is investigated whether the electricity and coal price volatility coefficients are statistically significant. When the models showing the effect of electricity and coal price volatility on BIST food, beverage (XGIDA) index, BIST chemical, petrol, plastic (XKMYA) index and BIST textile, leather (XTEKS) index returns are examined, it is concluded that the coefficients of electricity and coal price volatility are statistically insignificant. When the models showing the effect of electricity and coal price volatility on BIST wood, paper, printing (XKAGT) index and BIST metal products, machinery. (XMESY) index returns are examined, it is concluded that the coefficient of electricity price volatility is statistically significant but the coefficient of coal price volatility is statistically insignificant. When the models showing the effect of electricity and coal volatility on BIST non-metal mineral product (XTAST) index return is examined, it is concluded that the coefficients of electricity and coal volatility are statistically significant. When the models showing the effect of electricity and coal volatility on BIST basic metal (MANA) index return is examined, it is concluded that the coefficient of coal price volatility is statistically significant but the coefficient of electricity price volatility is statistically insignificant.