An investigation into the role of market beta in asset pricing: Evidence from the Romanian stock market

In this paper, we apply the FM methodology to the cross-section of Romanian-listed common stocks and investigate the explanatory power of market beta on the cross-section of commons stock returns from Bucharest Stock Exchange. Various assumptions are empirically tested, such us linearity, market efficiency, the no systematic effect of non-beta risk hypothesis or the positive expected risk-return trade-off hypothesis. We find that the Romanian stock market shows the same properties as the other emerging markets in terms of efficiency and significance of the linear risk return models. Our analysis included weekly returns from January 2002 until May 2010 and the portfolio formation, estimation and testing was performed in a rolling manner using 51 observations (one year) for each stage of the analysis.