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Relation Between Expected Return And Volatility At Bucharest Stock Exchange, On Business Cycle Stages


  • Viorica Chirila

    (‘Alexandru Ioan Cuza‘ University Iasi Romania)

  • Ciprian Chirila

    (‘Alexandru Ioan Cuza‘ University Iasi Romania)


The study of the relation between risk and return is an important topic forinvestors in financial assets, which is the reason why many researchers have tackled it. It isonly natural for an investor with aversion for risk, who undertakes a higher risk investment,mare to expect be rewarded accordingly, that is to achieve higher return rates. The researchconducted on various stock markets had contradictory results, which means that the existenceof such a connection is not certain on all stock markets. According to a new hypothesis,tackled by the latest studies, the aversion for risk of rational investors may be related to thestages of the business cycles. This paper deals with the connection between expected returnand volatility at Bucharest Stock Exchange, by analyzing the return and volatility of the BETindex portfolio. In order to assess this relation, we employed heteroskedastic autoregressivemodels. The study was conducted between January 2000 and April 2011, as well as duringtwo sub-periods determined by different business cycle phases: economic growth andrecession. The results revealed significant differences between the whole analyzed period andthe economic growth and recession sub-periods. By studying BSE return throughout theanalyzed period, we conclude that there is no relationship between expected return and risk,whereas volatility is asymmetric. Actually, one may witness a relation between return andrisk, as well as a non-asymmetric response of volatility to shocks during economic growth,and no risk-return relationship and asymmetric volatility during economic recession. Also,results have shown a positive relationship between return and volatility during economicgrowth, and a negative relationship between the same during economic recession.

Suggested Citation

  • Viorica Chirila & Ciprian Chirila, 2012. "Relation Between Expected Return And Volatility At Bucharest Stock Exchange, On Business Cycle Stages," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(14), pages 1-13.
  • Handle: RePEc:alu:journl:v:1:y:2012:i:14:p:13

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    References listed on IDEAS

    1. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    2. Harding, Don & Pagan, Adrian, 2001. "Extracting, Using and Analysing Cyclical Information," MPRA Paper 15, University Library of Munich, Germany.
    3. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
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    More about this item


    business cycle; return; volatility; return-volatility relation;

    JEL classification:

    • G - Financial Economics
    • C - Mathematical and Quantitative Methods


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