Testing the risk and return trade-off in the Athens stock exchange

Spyridis, Theodoros (2009) Testing the risk and return trade-off in the Athens stock exchange. PhD thesis, University of Greenwich.

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Abstract

The present thesis is focused on the examination of the relationship between specific variables with the application of asset pricing models as well as the employment of (G)ARCH models, unit root and cointegration analysis. A theoretical and empirical review on the models is presented and, more specifically, there is an empirical examination of the validity of the Capital Asset Pricing Model (CAPM) and the two main forms of the Arbitrage Pricing Theory (APT) in the Athens Stock Exchange (ASE) during the period 1989-2006. Furthermore, there is an empirical application of specific (G)ARCH models on the variables under examination and an investigation of whether there are long-run relationships between different sets of financial and macroeconomic variables – whether the variables are cointegrated.

The results of the tests show the inability of the CAPM to explain the behaviour of stocks for the period under examination, as well as for the sub-periods (1984-1994, 1995-2000, and 2001-2006 respectively). This means that the (optimal) market portfolio used in the CAPM presents a poor explanatory power on the returns of stocks. On the contrary, the results of the statistical APT model show that there may be factors other than the market portfolio that can explain the behaviour of stocks. Similarly, the results from the application of the macroeconomic APT model show that specific macroeconomic variables can partially explain stocks’ behaviour. Finally, the existence of long-run relationships between macroeconomic and financial variables, based on a series of cointegration tests, is evidence that there are different factors that can affect stocks, leading to a possible weak-form inefficiency of the Greek market.

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