1. ^aDepartment of Finance, American University in Bulgaria, 1 Izmirliev str., 2700 Blagoevgrad, Bulgaria. E-mail: mmateev@aubg.bg
2. ^bBoraInvest Company, 3 Triadica str., 1000 Sofia, Bulgaria. E-mail: videv@portfolio.bg

Abstract

This paper studies empirically the role of different economy-wide factors in explaining cross-sectional variation in stock returns in emerging markets. Using a sample of common stocks, traded on the Bulgarian stock exchange (BSE), we examine the relationship between macroeconomics and capital markets in order to determine whether the variations in stock returns can be explained by macroeconomic variables that might proxy for relevant systematic factors. We use a two-pass regression procedure following the Chen et al. approach. Relevant macroeconomic variables such as trade deficit, unexpected inflation, and country risk premium are found to play a significant role in explaining the fluctuations of stock returns in emerging markets.