RELATION BETWEEN EXPECTED RETURN AND VOLATILITY AT
 BUCHAREST STOCK EXCHANGE, ON BUSINESS CYCLE STAGES


              Viorica Chirilă, „Alexandru Ioan Cuza” University, Iaşi, Romania,
              Ciprian Chirilă, „Alexandru Ioan Cuza” University, Iaşi, Romania

ABSTRACT: The study of the relation between risk and return is an important topic for
investors in financial assets, which is the reason why many researchers have tackled it. It is
only 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 research
conducted on various stock markets had contradictory results, which means that the existence
of 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 the
stages of the business cycles. This paper deals with the connection between expected return
and volatility at Bucharest Stock Exchange, by analyzing the return and volatility of the BET
index portfolio. In order to assess this relation, we employed heteroskedastic autoregressive
models. The study was conducted between January 2000 and April 2011, as well as during
two sub-periods determined by different business cycle phases: economic growth and
recession. The results revealed significant differences between the whole analyzed period and
the economic growth and recession sub-periods. By studying BSE return throughout the
analyzed 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 and
risk, 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 economic
growth, and a negative relationship between the same during economic recession.

Keywords: business cycle, return, volatility, return-volatility relation

JEL Classification: G 11, C 58