Geopolitical risk in financial markets: an analysis of commodity hedging and stock returns in Europe

Against the backdrop of rising geopolitical uncertainty and increased commodity market volatility, this paper aims to quantify European firms' exposure to commodity price risk and to examine the effects of hedging by means of commodity derivatives. The empirical analysis is based on pooled OLS on a balanced dataset of 57 publicly listed firms operating in commodity-intensive sectors, over the period 2010–2024. Results can be summarized as follows. First, European firms exhibit a statistically significant exposure to commodity price risk, which is on average positive for Oil & Gas, Materials and Industrial Products firms, and on average negative for Utilities. Further, a year-by-year analysis reveals that around major geopolitical events (e.g. the 2014 oil price collapse and the 2022 Russia–Ukraine conflict), the proportion of firms with statistically significant exposure tends to increase. Second, the role of commodity hedging varies substantially across sectors: while hedging significantly reduces the long-run exposure to commodity price risk in the Materials and Utilities sectors, during the Russia–Ukraine war it is associated with lower stock returns in the Oil & Gas sector and with higher stock returns in the Industrial Products sector. These results highlight the importance of actively managing commodity price risk, particularly during periods of heightened geopolitical uncertainty, and the valuable yet heterogeneous role of hedging strategies across sectors and market conditions.