IDEAS home Printed from https://ideas.repec.org/p/dui/wpaper/1106.html
   My bibliography  Save this paper

Fuel mix characteristics and expected stock returns of European power companies

Author

Listed:
  • Malte Sunderkötter

    (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen)

Abstract

This article investigates the impact of the fuel mix structure in power generation portfolios on expected stock returns for major European power companies. The 22 biggest publicly listed European power producers are examined between January 2005 and December 2010. Based on the capital asset pricing model (CAPM) and multi†factor market models, the systematic risk of the power companies relative to the overall market performance and other typical energy and macroeconomic risk factors is analyzed. The full†information approach is used to determine technology†specific betas and risk factor sensitivities from the sample. Although most companies are not exclusively in the power producing business, it is shown that the generation fuel mix has a significant impact on the historical stock returns of the investigated companies. In particular, the sample companies exhibit significant differences in the systematic risk of gas and nuclear generation technologies compared with renewable technologies measured by technology†specific, delevered beta factors. This study extends existing literature and contributes new insights in two ways: Firstly, this is to our knowledge the first empirical analysis comparing the financial risk of different electricity generation technologies. Secondly, the results provide practical benefit to determine adequate riskadjusted capital costs for typical generation technologies. Therewith, this study is relevant for evaluating all kinds of power plant investments.

Suggested Citation

  • Malte Sunderkötter, 2011. "Fuel mix characteristics and expected stock returns of European power companies," EWL Working Papers 11056, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Oct 2011.
    • Handle: RePEc:dui:wpaper:1106
    as

    Download full text from publisher

    File URL: http://www.wiwi.uni-due.de/fileadmin/fileupload/BWL-ENERGIE/Arbeitspapiere/RePEc/pdf/wp1106_Fuel_mix_characteristics_and_expected_stock_returns_12Oct11_MS_EWL_workingpaper.pdf
    File Function: First version, 2011
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Gregor, ZOETTL, 2008. "On investment decisions in liberalized electricity markets : the impact of price caps at the spot market," Discussion Papers (ECON - Département des Sciences Economiques) 2008028, Université catholique de Louvain, Département des Sciences Economiques.
    2. Boyer, M. Martin & Filion, Didier, 2007. "Common and fundamental factors in stock returns of Canadian oil and gas companies," Energy Economics, Elsevier, vol. 29(3), pages 428-453, May.
    3. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    4. Roques, Fabien A. & Newbery, David M. & Nuttall, William J., 2008. "Fuel mix diversification incentives in liberalized electricity markets: A Mean-Variance Portfolio theory approach," Energy Economics, Elsevier, vol. 30(4), pages 1831-1849, July.
    5. Henriques, Irene & Sadorsky, Perry, 2008. "Oil prices and the stock prices of alternative energy companies," Energy Economics, Elsevier, vol. 30(3), pages 998-1010, May.
    6. Leahy, John V & Whited, Toni M, 1996. "The Effect of Uncertainty on Investment: Some Stylized Facts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 64-83, February.
    7. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    8. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    9. Oren, Shmuel S & Smith, Stephen S & Wilson, Robert B, 1985. "Capacity Pricing," Econometrica, Econometric Society, vol. 53(3), pages 545-566, May.
    10. Sadorsky, Perry, 2001. "Risk factors in stock returns of Canadian oil and gas companies," Energy Economics, Elsevier, vol. 23(1), pages 17-28, January.
    11. Bower, Dorothy H & Bower, Richard S & Logue, Dennis E, 1984. "Arbitrage Pricing Theory and Utility Stock Returns," Journal of Finance, American Finance Association, vol. 39(4), pages 1041-1054, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yue-Jun Zhang & Yi-Ming Wei, 2011. "The dynamic influence of advanced stock market risk on international crude oil returns: an empirical analysis," Quantitative Finance, Taylor & Francis Journals, vol. 11(7), pages 967-978.
    2. Swaray, Raymond & Salisu, Afees A., 2018. "A firm-level analysis of the upstream-downstream dichotomy in the oil-stock nexus," Global Finance Journal, Elsevier, vol. 37(C), pages 199-218.
    3. Koch, Nicolas & Bassen, Alexander, 2013. "Valuing the carbon exposure of European utilities. The role of fuel mix, permit allocation and replacement investments," Energy Economics, Elsevier, vol. 36(C), pages 431-443.
    4. David C Broadstock & Rui Wang & Dayong Zhang, 2014. "The direct and indirect effects of oil shocks on energy related stocks," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 146, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
    5. Misund, Bard & Mohn, Klaus, 2014. "Exploration Risk in Oil & Gas Shareholder Returns," UiS Working Papers in Economics and Finance 2014/4, University of Stavanger.
    6. Broadstock, David C. & Wang, Rui & Zhang, Dayong, 2014. "Direct and indirect oil shocks and their impacts upon energy related stocks," Economic Systems, Elsevier, vol. 38(3), pages 451-467.
    7. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    8. Oberndorfer, Ulrich, 2009. "Energy prices, volatility, and the stock market: Evidence from the Eurozone," Energy Policy, Elsevier, vol. 37(12), pages 5787-5795, December.
    9. Ben Ammar, Semir & Eling, Martin, 2015. "Common risk factors of infrastructure investments," Energy Economics, Elsevier, vol. 49(C), pages 257-273.
    10. Sadorsky, Perry, 2008. "Assessing the impact of oil prices on firms of different sizes: Its tough being in the middle," Energy Policy, Elsevier, vol. 36(10), pages 3854-3861, October.
    11. Sunil K. Mohanty & Stein Frydenberg & Petter Osmundsen & Sjur Westgaard & Christian Skjøld, 2023. "Risk factors in stock returns of U.S. oil and gas companies: evidence from quantile regression analysis," Review of Quantitative Finance and Accounting, Springer, vol. 60(2), pages 715-746, February.
    12. Basher, Syed Abul & Haug, Alfred A. & Sadorsky, Perry, 2012. "Oil prices, exchange rates and emerging stock markets," Energy Economics, Elsevier, vol. 34(1), pages 227-240.
    13. Roman Mestre, 2021. "A wavelet approach of investing behaviors and their effects on risk exposures," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-37, December.
    14. Tinic, Murat & Sensoy, Ahmet & Demir, Muge & Nguyen, Duc Khuong, 2020. "Broker Network Connectivity and the Cross-Section of Expected Stock Returns," MPRA Paper 104719, University Library of Munich, Germany.
    15. Aynur Pala, 2014. "The Effect of Valuation Ratios, Gold Price, and Petroleum Price on Equity Returns: A Comparison of Static Panel and Quantile Regressions," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(1), pages 80-89, January.
    16. Kazemilari, Mansooreh & Mardani, Abbas & Streimikiene, Dalia & Zavadskas, Edmundas Kazimieras, 2017. "An overview of renewable energy companies in stock exchange: Evidence from minimal spanning tree approach," Renewable Energy, Elsevier, vol. 102(PA), pages 107-117.
    17. Arouri, Mohamed El Hedi, 2011. "Does crude oil move stock markets in Europe? A sector investigation," Economic Modelling, Elsevier, vol. 28(4), pages 1716-1725, July.
    18. Ekhlas Al-hajj & Usama Al-Mulali & Sakiru Adebola Solarin, 2021. "Exploring the nexus between oil price shocks and sectoral stock returns: a new evidence from stock exchange in Malaysia," Economic Change and Restructuring, Springer, vol. 54(1), pages 199-217, February.
    19. Bård Misund & Petter Osmundsen, 2015. "Probable Oil and Gas Reserves and Shareholder Returns: The Impact of Shale Gas," CESifo Working Paper Series 5687, CESifo.
    20. Ramos, Sofia B. & Veiga, Helena, 2011. "Risk factors in oil and gas industry returns: International evidence," Energy Economics, Elsevier, vol. 33(3), pages 525-542, May.

    More about this item

    Keywords

    power plant investments; asset pricing; fuel mix diversification;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dui:wpaper:1106. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Andreas Fritz (email available below). General contact details of provider: https://edirc.repec.org/data/fwessde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.