Jerzy Gajdka

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.

Economic Growth, Corporate Earnings and Equity Returns: Evidence from Central and Eastern European Countries

Abstract This paper discusses the links between economic growth, corporate earnings and stock returns. Cross-country correlation studies do not confirm the intuitive assumption that higher returns on equities are more likely in the faster-growing countries. The problem can be analysed more deeply by analysing stock returns with respect to the growth of earnings per share (EPS) and changes in valuation (P/E ratio). Within this framework, two types of factors explaining the lack of correlation between GDP growth and stock returns are distinguished. The empirical research on developed and emerging market countries reveals that in the long run stock price returns are driven by companies’ earnings, and that the lack of correlation between GDP growth and equity returns is almost fully explained by the divergence between GDP growth and EPS growth. In this article the results of an investigation into this area, based on a sample of post-communist Central and Eastern European countries, are presented and discussed. It was found that in these countries changes in valuation (P/E ratio) appear to play an important role, cancelling the impact of EPS growth on stock returns.