Relation Between Expected Return And Volatility At Bucharest Stock Exchange, On Business Cycle Stages
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.
Volume (Year): 1 (2012)
Issue (Month): 14 ()
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- Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
- Harding, Don & Pagan, Adrian, 2001. "Extracting, Using and Analysing Cyclical Information," MPRA Paper 15, University Library of Munich, Germany.
- Bollerslev, Tim, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
Journal of Econometrics,
Elsevier, vol. 31(3), pages 307-327, April.
- Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
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