Janusz Brzeszczyński

The Role of Stock Size and Trading Intensity in the Magnitude of the "Interval Effect" in Beta Estimation: Empirical Evidence from the Polish Capital Market

In this paper, we present empirical evidence about the interval effect in estimation of beta parameters for stocks listed on the Warsaw Stock Exchange. We analyze models constructed for the returns calculated using intervals of different length—that is, 1, 5, 10, and 21 trading days (corresponding to, roughly, 1 day, 1 week, 2 weeks, and 1 month, respectively). In the cases in which heteroskedasticity was present, we estimated ARCH models. The results indicate that the estimates of betas for the same stock differ considerably when various return intervals are used. We further explore the source of differences in betas for every stock by investigating the relations between them and such factors as stock size and its trading intensity. The empirical results provide evidence that a statistically significant relationship exists between these two characteristics of stocks. This finding has important practical implications for beta estimation in practice.

Are there benefits from trading strategy based on the returns spillovers to the emerging stock markets? Evidence from Poland

This study investigates benefits from a trading strategy based on the spillovers from international stock markets to the Polish emerging stock market. The analysis is conducted within the framework of factor and predictive generalized autoregressive conditional heteroskedasticity (GARCH) models of the Warsaw Stock Exchange main index, WIG. We apply an approach in which the mean equation of the GARCH model includes a deterministic part incorporating cross-markets linkages. Both in-sample and out-of-sample forecasts from the estimated models are calculated. The trading strategy is based on signals from the out-of-sample predictions. The models performance and benefits from adopting such a strategy are evaluated using direction quality measures. Our results suggest that predictive models using cross-market linkages can produce superior out-of-sample forecasts compared to benchmarks.

How beneficial Is international stock market information in domestic stock market trading

This paper uses the foreign information transmission (FIT) model of Ibrahim and Brzeszczynski [Inter-regional and region-specific transmission of international stock market returns: The role of foreign information. Journal of International Money and Finance 28, no. 2: 322–43] to quantify the incremental benefits of foreign overnight international stock market information over domestic market momentum information. The main objective is to answer the question: how much more (or less) returns will a day trader earn by using various combinations of different interpretations of foreign news signals and domestic market momentum than the latter alone? Trading strategies are constructed with added features that take advantage of better modelling of changes over time in the return equivalent of the meteor shower of Engle, Ito, and Lin [Meteor showers or heat waves? Heteroscedastic intra-daily volatility in the foreign exchange market. Econometrica 58, no. 3: 525–42]. The results show that overnight international information is more economically beneficial than previous-days domestic information. Moreover, better modelling of the time variation in the impact of this overnight information has substantial benefits to stock market investors.

Heteroscedasticity and interval effects in estimating beta: UK evidence

The article compares beta estimates obtained from Ordinary Least Squares (OLS) regression with estimates corrected for heteroscedasticity of the error term using Autoregressive Conditional Heteroscedasticity (ARCH) models, for 145 UK shares. The differences are mainly less than 0.10, for betas calculated using daily returns, but even such small differences can matter in practice. OLS tends to overestimate the beta coefficients compared with ARCH models, and selecting an ARCH type estimate makes the most difference for large cap shares. Regarding the measurement interval, the downward bias in betas from daily returns is associated with not only thin trading but also the volatility of the shares daily returns. We infer that the idiosyncratic component in daily returns, as well as lack of trading, is responsible for low daily betas.

Public information arrival and investor reaction during a period of institutional change: An episode of early years of a newly independent central bank

Employing unique data derived directly from the Reuters electronic brokerage platform for currency trading, this paper investigates the reaction of investors to central bank announcements on the foreign exchange market in Poland in the years 2000–2003. Our sample period captures a time during which the National Bank of Poland (NBP) gained independence and it was transforming institutionally and switching to a new monetary policy regime; namely inflation targeting. Evidence indicates that central bank communication helped reduce foreign exchange market uncertainty, measured by the conditional variance of foreign exchange returns, and increased trading volume. The findings suggest that in newly emerging economies with major institutional changes, investors may react significantly to central bank communication, and central banks can hence play an important role in market development during an institutional change. Our results also have broader implications for the applicability of micro-structure models in newly emerging economies.

Neoclassical and Behavioral Finance: A Synergy of Approaches in Current Debates and in Contemporary Financial Research

One of the most prominent changes in the development of finance as a scientific discipline at the turn of the 21st century has been a rapidly increasing interest in behavioral finance: the field of study that combines the knowledge of finance with psychology and proposes psychology-based theories to explain various phenomena that occur in the financial environment. Behavioral finance has grown in importance all over the world, and it became a challenge to the neoclassical theory of finance that had been prevailing so far and which relies mainly on a broad assumption that the decisions made by different groups of agents in financial markets are fully rational. Currently, both those approaches constitute major fields of intensive empirical investigations within the realm of the modern science of finance, although they are sometimes considered as complementary rather than competitive concepts. Research in finance deals with studying different issues concerning money, including provision of funds, funds allocation, managing and profiling project risk, etc. Both neoclassical and behavioral finance approaches attempt to find the way to explain the decision-making processes regarding these issues; however they use different tools, apply different perspectives, and often reach different conclusions. The international conference “Neoclassical and Behavioral Finance,” organized at the University of Łódź on June 26–27, 2014, was an opportunity to discuss and compare the achievements of both traditional finance and behavioral finance approaches. It was one of the first such forums in Poland where behavioral finance researchers from various scientific centers and the researchers representing the neoclassical approach to finance could present and debate their achievements. The outcomes of discussions at the conference sessions demonstrate that the combination of these two research approaches may become an important method, which can explain many puzzling financial phenomena and, ultimately, lead to a new paradigm in finance. In this issue of Emerging Markets Finance and Trade, we present the five best articles selected from the “Neoclassical and Behavioral Finance” conference. They deal with various aspects of financial systems, financial markets, and corporate finance analysis, and they present considerations that include both the neoclassical and behavioral perspectives. Gonzalo Camba-Méndez, Konrad Kostrzewa, Anna Marszal, and Dobromił Serwa, in the article “Pricing Sovereign Credit Risk of Poland: Evidence from the CDS Market,” analyze the sovereign credit risk of Polish debt during the period of a global financial crisis. They find that the most likely scenario of a sovereign credit event in Poland is associated with temporary liquidity problems rather than a full-blown sovereign default with a major debt restructuring. Their conclusions are important in understanding of the role of the time-varying expected losses in the pricing of sovereign risk.

Does Central Bank Communication Matter in Emerging European Markets? Evidence from Poland

We analyze the impact of monetary policy communication of the National Bank of Poland (NBP), i.e. NBP announcements of interest rates changes and NBP announcements of new macroeconomic figures, on the financial market in Poland in its two main segments: the foreign exchange market and the stock market, and we provide evidence on how they react to public information released by the NBP. In particular, we are interested in the uncertainty (i.e. risk) effects and the wealth (i.e. return) effects of NBP communication, i.e. whether the NBP announcements had any influence on stock and foreign exchange returns and on the activity of those two markets. Using ARCH methodology, we document negative effects in the conditional variance of ARCH models of WIG index volume of trade and WIG returns and PLN/USD bid-ask spread and PLN/USD returns, suggesting the existence of calming effects of NBP communication with financial markets on the changes of their activity. The evidence presented in our study indicates that the NBP announcements had stabilizing effects on stock and foreign exchange markets in Poland.

Liquidity Measures and Cost of Trading in an Illiquid Market

We provide the first in-depth study of trading on the Ukrainian stock exchange, using trade-by-trade data. Although Ukraine has some large listed companies, the market is quite illiquid. We study the efficiency of five liquidity measures in the market. The proportion of no-trading days is the most reliable of the five, while turnover, which is widely used in the literature, is a poor measure. On trading cost, trades in all size categories are executed within the quoted spread, as in other dealership markets, with medium-sized trades being the cheapest. The cost of sales is higher than the cost of purchases under all market conditions. JEL Classification: G15, C51

Earnings Management in Polish Companies

Earnings Management in Polish Companies This paper presents results of the investigation of a phenomenon known as earnings management (EM) among the companies listed on the Polish stock market. The distribution of earnings per share (EPS) for the stocks around the threshold value of zero and the threshold of recent performance was analyzed in the period of years 1997-2010. Moreover, the changes of earnings for the stocks, which are suspected to manipulate their earnings, were also investigated. The results, which indicate asymmetric distribution of earnings around the zero threshold along with the relative deterioration of earnings in the year following the period when the companies were suspected to conduct earnings management practices, provide evidence that this phenomenon exists among Polish stock market companies. Zarządzanie Zyskiem w Polskich Spółkach Giełdowych W artykule zaprezentowano rezultaty analizy zjawiska znanego jako zarządzanie zyskami, wśród spółek z polskiego rynku kapitałowego. Przeanalizowano rozkład zysku na akcję wokół progu zero oraz progu wyznaczonego w oparciu o wartości zysku na akcję z okresu przeszłego w okresie 1997-2010. Wyniki badania potwierdziły występowanie asymetrii rozkładu zysku na akcję wokół progu zero oraz spadek zysków w latach następujących po zarządzaniu zyskiem co wskazuje na występowanie analizowanego zjawiska na polskim rynku kapitałowym.

A Stock Market Trading System Based on Foreign and Domestic Information

Abstract This paper investigates whether a particular magnitude and direction of inter-regional return signal transmission dominates the performance of domestic trading in American, European and Australasian stock markets. A trading system design, based on fuzzy logic rules, combines direct and indirect channels of foreign information transmission, modelled by stochastic parameter regressions, with domestic momentum information to generate stock market trading signals. Filters that control for magnitude and direction of trading signals are then used to investigate incremental impact on economic performance of the proposed investment system. The results indicate that at reasonable levels of transaction costs very profitable trades that are fewer in number do not increase investment performance as much as trades based on foreign information of a specific low-to-medium daily return magnitude of 0.5% to 0.75%. These information-based strategies are profitable on risk-adjusted bases and relative to a market, but performance declines considerably when tradable instruments are used.