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Efficiency of the Warsaw Stock Exchange: analysis of selected properties.

Article Excerpt
Abstract The Warsaw Stock Exchange (WSE) has been operating in present form for 15 years. WSE is regarded as an "emerging market". We can observe that it is still developing (in order to become "developed market"). The level of development is often analyzed with reference to the efficiency of the market. We can say that the capital market is efficient if the prices at the market fully reflect all available information. The aim of the presented research is to analyze the current situation at the Warsaw Stock Exchange. Particularly we investigate the weak form of efficiency using selected statistical tests. The research is based on actual data concerning daily observations of shares at the Warsaw Stock Exchange transformed to the logarithmic rates of return, considering the period 2000-2006 and subperiods: the bear market, stagnation and the bull market.

Keywords Warsaw Stock Exchange * Weak form of capital market efficiency . Runs test * Variance ratio test

JEL C10 * G10

Introduction

The history of the capital market in Poland contains facts that have been collected for nearly 200 years. The new Warsaw Stock Exchange (WSE) started in 1991 and it has been developing rapidly ever since (Table 1).

Table 1 Main characteristics of Warsaw Stock Exchange years 1991 and 2006 comparison Characteristic Year 2006 1991 Listed instruments Companies 284 9 of which foreign 12 -- Bonds 65 -- of which foreign 4 -- Market capitalization (PLN mil.) Domestic companies 437,719 161 Foreign companies 198,190 -- Domestic bonds 323,369 -- Domestic companies 720 -- Total turnover value (PLN mil.) Shares 334,539 30 Bonds 5 536 -- Futures contracts 377,437 -- Options 19.453 -- Source: Own calculation based on http://www.gpw.com.pl/7.03.2007.

The changes and activity of the stock exchange is described by market indexes. Stock indexes are composite index numbers that measure the relative changes in values of several variables, taken as a combination. According to the list of stocks that are taken for the index calculation, the certain index describes the situation of the whole capital market or the particular part of it. The Warsaw Stock Exchange publishes several market indexes. These indexes are:

* Evaluated for the whole market: WIG the total return index, which includes dividends and pre-emptive rights (subscription rights), and it contains the biggest and mid size companies (161 companies as of March 07, 2007) WIG20 the price index of the 20 biggest and the most liquid companies; the portfolio is quarterly revised and adjusted on the third Friday of March, June, September, December MIDWIG the price index that is calculated on the basis of the mid size companies WIRR the total return index (i.e. it includes dividends and pre-emptive rights) of the smallest companies listed on WSE (83 companies as of March 07, 2007) WIG-PL the total return index (i.e. it includes dividends and pre-emptive rights), of Polish companies (166 companies as of March 07, 2007) or

* Evaluated for the economic branches: TechWIG (the price index of all companies from the segment for innovative technologies--SiTech), WIGbanking, WIGconstruction, WIGit, WIGmedia, WIGoil&gas, WIGfood and WIGtelecom are the total return indexes that contains all companies from the selected branches.

Since WSE seems to represent the developed capital market, it is necessary to introduce several changes into the market index calculations. Thus, starting on March 19, 2007 new stock indexes as well as the rules of calculation of the existing ones was introduced. Here the question arises how to recognize the developed market. In our research it is defined as efficient one.

The research on the stock securities has long history. The study of Bachelier (1900) is considered to be first pioneering contribution in this area. The next important step in examining the financial market was calling upon the Cowles Commission. Over 30 years later, E. Fama formulated EMH--Efficient Market Hypothesis (see Fama 1970, 1991) which was a summarization of ideas that the prices at the capital market fully reflect available information so that market could be called efficient (see i.e. Campbell et al. 1995, p. 20). Three forms of the capital market efficiency can be distinguished (Campbell et al. 1995, p. 22):

* Weak-Form Efficiency when prices reflect all information contained in past trading,

* Semistrong-Form Efficiency when prices reflect all publicly available information,

* Strong-Form Efficiency when prices reflect all relevant information including...

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