Volatility in transition: fossil fuel dependence, renewable shifts, and financial risk across Europe’s Eastern divide

Europe’s energy landscape has undergone profound disruptions following the escalation of the Russo-Ukrainian war, exposing deep structural vulnerabilities in the continent’s persistent reliance on fossil fuels. The crisis intensified political and economic tensions across the longstanding European Eastern divide, as the abrupt suspension of Russian gas disrupted energy security, triggered unprecedented price volatility, and accentuated disparities in the capacity of European Union Member States to pursue their green transitions. This paper investigates the asymmetric dynamics of fossil-fuel dependency and renewable energy expansion across ten Central/East European countries (CEEs, namely Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia) by applying a GARCH(1,1) and GARCH-MIDAS framework to examine short-run volatility characterizing the countries’ leading stock markets; such volatility stems from long-run macroeconomic and geopolitical pressures resulting from fossil fuels energy pressures. The research findings provide evidence of pronounced volatility clustering and slow mean reversion across countries, with the volatility half-life confirming substantial heterogeneity in shock persistence. Policymakers need to carefully consider the heterogeneous nature of volatility transmission mechanisms across the CEEs, the importance of country-specific structural and geopolitical factors, and their implications for volatility dynamics in small open economies during their energy transitions.