The Polish stock market : risk and risk premia

Abstract

This paper analyzes issues related to the pricing of equity in an Eastern European emerging capital market, the Warsaw Stock Exchange (WSE), with the purpose of estimating the CAPM, and the return-risk relationship, using the domestic and the international asset-pricing model. The empirical evidence from a sample of 221 Polish firms listed on the Warsaw Stock Exchange indicates that there exists a (sign-) conditional relationship between beta and return when the domestic CAPM is tested. The international CAPM did not perform well in the early days of the transition but since 2000 the Polish stock market seems well integrated. Most likely the local market has been segmented during the early period. The cross-sectional stock returns are positively related to the downside risk variable measured by the semi-deviation from the mean, and the total risk. However, the crosssectional stock returns are also positively related to the unsystematic risk, and negatively related to other downside risk measures. In addition, firm size is found to be positively related to the cross-sectional stock returns, while the book-to-market ratio is found to have no explanatory power as regards the returns. (original abstract)