Informational (in)efficiency of the Polish Stock Exchange

Jaroslaw Kilon

Abstract


Purpose. The price of a financial instrument traded on capital market is a direct or indirect reflection of a number of complex economic phenomena. Modern understanding of the theory of efficient capital markets is based on the definition of Eugene Fama, according to which an efficient market is the one in which prices always fully reflect available information. As long as the market is considered efficient all the investment strategies that are based on generally available information do not allow investors to achieve above-average rates of return, and the changes of financial asset prices are random. The aim of this study is to determine whether (and to what extent) the weak form of efficient-market hypothesis can be considered true in relation to the financial instruments listed on the Warsaw Stock Exchange.

Methodology. Verification of the weak form of the efficient-market hypothesis (EMH) presented in this paper is mostly based on the assumption that the use of investment strategies based on the knowledge of past prices of financial instruments does not guarantee higher than average rates of returns. The study was carried out in an indirect way, using three types of statistical tests of randomness: autocorrelation test, series test and the test for the presence of unit root. All the results were additionally confirmed by the simulations of market performance of selected investment strategies.

Results. The results presented in that paper do not permit for an unequivocal rejection of the weak form of hypothesis of informational efficiency of the Warsaw Stock Exchange. The obtained results are consistent with the conclusions of other studies, which identified some cases of informational inefficiency of WSE, particularly in relation to the small and medium-sized companies.

The theoretical contribution. The research is an extension of previous studies on the informational efficiency of the Polish capital market. In this paper not only an in-depth analysis of shares quoted on the Warsaw Stock Exchange was made, but a wide range of financial instruments was examined, including derivatives such as financial futures.

Practical implications (if applicable). The direct practical implication of this paper is the assumption that the selected active investment strategies can be successfully used for some groups of shares and financial instruments quoted on WSE.

Keywords: EMH; financial instruments, investment strategy; Warsaw Stock Exchange.

Paper type: Research paper.


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