Contemporary Trends and Challenges in Finance

Stock returns on many stock exchanges worldwide are much higher when markets are closed for trading versus when they are open. We evaluate this temporal market anomaly with respect to market betas and volatility for the example of the WIG20 index in the Warsaw stock exchange and the German DAX. We provide an in-depth characterization of stock returns, emphasise the importance to decompose return components and reveal fundamental differences between Polish and German stock markets. Furthermore, we address possible reasons for the higher rates of night returns, e.g. news flow, liquidity and bid-ask spreads.

The article presents the results of empirical research on the occurrence of the effect of the day on the Warsaw Stock Exchange. The analysis was carried out for the daily rates of return of selected stock exchange indices in the period 2010–2018. In addition, the effect of the day for well-diversified portfolios such as Rao’s Quadratic Entropy Portfolios and the Most Diversified Portfolios, was also analyzed. One of the goals of the research was to establish whether the determined effect of the day is reflected in the level of diversification of the constructed portfolios. On the basis of the conducted research, it was determined that the day effect on the WSE occurs only in specific (annual) periods. This dependence was determined both for the rates of return of stocks as well as for the rates of return of portfolios. The occurrence of the effect of the day for a group of indices does not always translate into similar regularities for rates of return of portfolios or for the level of diversification of investment portfolios.

The dependency between volatility and liquidity is thoroughly examined in the contemporary literature on the financial markets. Especially, on the stock markets, liquidity tends to evaporate when volatility increases. Still, very few papers examine such relationships within the cryptocurrency markets. In this paper, we verify whether the volatility and liquidity of cryptocurrencies are interrelated. Our sample consists of 12 highly capitalized and traded cryptocurrencies. We consider both daily and weekly liquidity measures and thus extend the set of proxies. In order to examine the dependency between cryptocurrencies, the causality approach is employed. We use an asymmetric causality test to separate the influence of growths and declines of volatility to the changes of liquidity direction and the other way around. Overall, the empirical results indicate, inter alia, that high volatility is a Granger cause to high liquidity, which means that high volatility attracts investors and induce higher interest in the new financial instruments.

Banks constitute a specific sector of stock-exchange-listed companies. The main factors affecting their rates of return are financial indicators. The aim of this paper is to identify these factors. Using annual data from 1998 to 2018, an unbalanced panel was created, covering 13 banks listed on the Warsaw Stock Exchange. The model proposed has been estimated for selected financial indicators. Next, factor analysis was used, by the means of which the latent factors were calculated. The results of the research allowed identification of the impact the latent factors have on the rates of return and showed that the main indicators determining the rate-of-return level were the operating profit margin, the return on equity, the equity ratio and the share of the operating expenses in the income on core operations.

This study examined the cross-sectional relationships between realized returns and systematic risk measures using sub-sectoral indices quoted on Warsaw Stock Exchange. In addition to the classical beta, the aim of the study is also to check the impact of higher order co-moments on the sub-indices pricing. The unconditional risk-return relationships are estimated using classical and downside measures and conditional relations in terms of market condition. The downside risk premiums are significantly positive which means, that the downside risk is priced in Polish stock market. The downside risk measures outperform the classical ones. While the market condition is incorporated as the conditioning variable the risk factors acquire significance. Beta coefficient and co-kurtosis generate positive premiums in the up market and negative in the down market. Using the sub-sector indices returns no significant co-skewness pricing in the up market is found. The research show that measures of systematic risk such as the beta coefficient and higher order co-moments in conventional and downside approach are appropriate risk factors in asset pricing.

We assess the accuracy of the popular trade classification rules—the tick (T), the reverse tick (RT), the quote (Q), the Lee and Ready (LR) and the Ellis, Michaely and O’Hara (EMO) rules—for the selected Central and Eastern Europe stock exchanges: the Warsaw Stock Exchange (WSE), the Prague Stock Exchange (PSE) and the Budapest Stock Exchange (BSE). We employ the transaction data on the most liquid stocks included in the large cap indices, namely WIG20, PX and BUX, from 9th of January till 14th of March, 2019, and discover the Q rule to be the most successful. It correctly classifies 100% of trades initiated both by the buyers and the sellers in the case of the BSE and 84.35% (82.78%) in the case of the WSE (the PSE). The results obtained for the LR rule are similarly good (96.32% for the BSE, 84.34% for the WSE and 82.86% for the PSE). The third one is the EMO rule with the rate of success of 83.69% for the BSE, 80.40% for the WSE and 67.86% for the PSE. The T and the RT rules are characterized by a considerably low level of accuracy (ranging from 19.91 to 40.65% for the T rule and from 13.04 to 38.37% for the RT rule). The modifications of the T and the RT rules that take into account the preceding and the following transaction price changes allow to obtain the distinctively higher estimates of accuracy statistics.

The aim of the study was to examine the correlation between the accounting profitability of the company and its rate of return on the capital market. In addition, betas and accounting betas were compared. The correlation between total variability and semi-variability of profitability ratios and rates of return was also analysed. The risk of a company was considered in variance and downside approaches. For calculating the downside risk, both the Bawa and Lindenberg formula and the Harlow and Rao formula were used. A positive correlation between the average value of the quarterly profitability ratios (ROA and ROE) and the average quarterly rates of return on the Warsaw Stock Exchange was identified. Similarly, companies with higher volatility and semi-volatility of the profitability ratios were simultaneously characterized by larger fluctuations in rates of return on the stock market. The correlations between market betas and accounting betas were statistically significant only in a downside approach. Accounting profitability had a greater effect on the rates on return and the risk for large and medium companies compared to small ones.

Commodity market is one of the most important element of the global economy as a global mechanism of valuation and distribution of goods, it has additionally become a kind of barometer of investor attitudes. This applies to companies whose operations are strongly related to the commodity market. The impact of market risk of commodities on the value of a company and its solvency is possible, when there is a correlation between the prices of commodities and share prices of the company. These types of relationships are not yet fully understood. This is due to the complexity of the processes that shapes the relationship between commodity markets and stock market. The purpose of this article is to assess the credit risk of listed companies whose activities are related to commodity markets, which means they are exposed to the market risk of commodities. Two stock markets have been selected for this purpose: the Italian market with a mature and well-established position in the global capital trading system and the stock market in Poland as representatives of developed economy, characterized by different stage of institutional development. In the opinion of the authors, companies with a significant difference in the probability of default for the baseline and crisis scenario are more exposed to the impact of commodity market risk.

The aim of the paper is to analyze how socially responsible behaviors can be considered as risk management tools. In particular, the underlying objective is to highlight the existence of a link between CSR and risk management within the healthcare sector of the Lombardy Region (Italy). The research is divided into two sections and the approach used combines both descriptive analysis and quantitative analysis methods: in the first part will be analyzed the concept of corporate social responsibility and risk management, describing the same concepts in the healthcare sector. In the second part, in order to highlight the CSR-risk management link, the paper analyses the web sites of the 8 health protection agencies of the Lombardy Region, created following the reform of the social and health system in Lombardy (Regional Law 23/2015). In our paper we demonstrate how a double bond (a double relationship) between CSR and RM exists. The first link classifies the CSR as an RM tool. At the same time, the RM can be considered a tool to demonstrate the social responsibility of the institution (or as a tool to prove that an institution is socially responsible).

The research aim is to verify whether and how corporate capital structure and its determinants vary between the old and new EU member states. The empirical research based on the BACH-ESD database provided by the European Commission covers private firms from 12 countries in the period 2000–2017. Apart from considering the length of EU membership, a number of firm-specific determinants and industry features are captured in order to identify the main differences in corporate financing patterns. The methods employed include analysis of variance as well as panel data modelling performed on the two subgroups of countries. Findings reveal that although corporate financing patterns differ significantly across the compared groups, with companies in old member countries more heavily dependent on debt, the determinants of corporate financing choices are less varied and provide more support for the pecking order theory. The results also indicate that the relevant importance of the country, industry, and firm size effects depends on the length of EU membership.

In the management of agency problems, the board of directors is an essential tool for monitoring the activities of the managers. The board of directors has specific characteristics associated with its effectiveness and efficiency, which can be transformed into the general performance of the company. This study aimed at providing evidence regarding the characteristics possessed by the East Africa community companies’ board of directors and their influence on the companies performance. Simultaneous system of equations and annual data from 16 companies for a period between 2003 and 2017 was used in the study. The study observed that the market performance measures to be highly influenced by the changes in the characteristics of the board such as board size, the proportion of women, proportion of independent directors and proportion of foreign directors. On the other hand, the account performance measures were less influenced by the board characteristics, and only ROE was more associated with the changes on board characteristics. During this period, the market was more overwhelmed by new information regarding the board characteristics as compared to the performance of the account measures.

The paper investigates different approaches to the construction of a term structure of interest rates—reference rates that are the base for a Fund Transfer Pricing mechanism (FTP). While many positions in the literature focus on FTP mechanism as a part of asset liability management (ALM) process without any closer look at term structure construction, we identify features that let measure the behavior of the yield curve and detect the consequences of the model’s choice. The results show that the arbitrarily chosen model of the reference yield could have significant consequences for risk management process of a financial institution. The study provides a twofold contribution to the literature describing FTP mechanism. First it introduces more complex approach to the reference rate modeling inside FTP mechanism and shows the differences between considered models. Moreover it focuses on the construction of the reference curve itself and shows two different approaches covering a parsimonious model as well as Smith-Wilson one.

We explore properties of the geometric distribution as means of constructing conditional coverage VaR tests. We study properties of these tests using asymptotic convergence of the test statistics. In this way, we replace Monte Carlo simulated distributions. We provide a unified framework that allows for effective comparison of various procedures. To achieve comparability we modify test statistics and adapt them to the conditional coverage hypothesis. We show that two tests that indirectly use properties of the geometric distribution—the test based on the General Method of Moments and the test based on the Gini coefficient—may be conveniently implemented with the use of known theoretical distributions. We argue that replacing Monte Carlo simulations with these distributions does not pose the risk of overrejecting correct risk models. We also demonstrate their efficiency at detecting incorrect models. We include practical guidelines about significance level and sample size that ensure accurate and efficient testing.

Using the transaction data on stocks included in the Warsaw Stock Exchange index WIG 20 from May to September 2017 I find that their prices tend to cluster on certain final digits as 0, 5 and 00. The probit analysis shows that the tendency for stock prices to cluster generally increases with increases in the traded volumes but not in the spreads. The response to one tick increase in the spread across the stocks is mixed in the sign and for the most of them—although statistically significant—is negligible in the magnitude.

Machine learning provides powerful tools for data analysis, especially in regression and classification problems what may be used in creation of investment strategies. This paper present an efficient way of utilization of one of the machine learning algorithms on examples of stock indices: Stoxx600, WIG20 and DAX. This work concentrates on time series analysis of stock indices with Random Forest algorithm to create investment strategies based on future probabilities of declines and upswings. Taking into account some macroeconomic characteristics, technical indicators and consensus estimates, the models are trained to provide a buy signal if the output probability is above a specific threshold and sell signal in case of the opposite situation. The examination of the strategies efficiency indicates the differences in determinants among chosen stock indices.

Credit risk assessment usually is a complex process, which consists of many successive steps and numerous criteria. Selection of good customers and rejection of potentially bad ones is vital as it directly and significantly affects the quality of bank’s credit portfolio. Also, ordering the decision alternatives is an important part of the whole decision-making analysis which takes place before making a final decision. The importance and complexity of the problem on one hand call for strictly analytical methods, however, on the other, also for a method which enables intuitive decision-making, imprecision and inaccurate linguistic ranks based on experts’ personal experience. The paper presents the utility of Simple Additive Weighting method in case of a credit risk assessment. The presented illustrative example bases on experts’ knowledge and their perception and evaluation of various linguistic, frequently imprecise criteria. Therefore, the order scale is described by trapezoidal oriented fuzzy numbers.

The purpose of this paper is to present the findings concerning the use of cost strategies by insurance companies which run business activity in Poland. The work includes a theoretical outline of the issues presented here, in which a definition of the term “cost strategy” will be proposed, that has been formulated on the basis of analysis of relevant literature. The present paper will also contain a discussion of cost strategies that can be implemented in the insurance company and present and elaborate more extensively on the findings regarding the use of the cost strategies by insurance companies in Poland in the years 2016–2018. Summing up the findings we can formulate the following conclusions: insurance companies in Poland pursue some cost strategies or other—for the whole of the insurance companies in the last year of the study, i.e. 2018 they made up ¼ of all the insurers (14 entities altogether in all the groups); the group of insurance companies in which information on pursuing cost strategies appeared most frequently are life insurance companies, operating as joint-stock companies; and the most popular cost strategies pursued by insurance companies in Poland are strategies aiming at cost reduction (for example in 2018 12, out of 14 business entities altogether, provided information indicating the use of a cost strategy whose objective was to reduce costs).

The aim of the article is to discuss the impact of capital requirements set out in the Solvency II Directive on the amount of dividends paid by life insurance companies in Poland. The study was conducted with the use of an estimator of random effects of panel data of the entire market consists of 24 insurance companies. The data was taken from Solvency and Financial Condition Reports for the total period of Solvency II Directive obligatory use (2016–2018). Life insurance companies are required to apply a number of legal regulations that determine the amount of dividend paid. However, simultaneously they are exposed to numerous risks which are not covered by capital requirements. Our results indicate that the amount of dividend is strongly correlated with the capital requirements. Capital requirements determine the level of profits earned in life insurance companies. There is a negative correlation between the capital retention (outflow) and the financial position of the life insurance company.

The paper quantifies two aspects of systemic risk in selected countries of Central and Eastern Europe over the period of 2006–2018: fragility and contagion. The paper adds to existing literature in three ways. Firstly, we present the results of calculation of two well-known measures (SRISK and CoVaR) for countries for which these measures were not calculated before due to technical problems with application, which we overcome by using our own proposals of modification. Secondly, by proposing our own methods of proxying we are able to include a significantly bigger number of systemically important financial institutions in the measurement of systemic risk than any other scientific paper quantifying this risk for the analyzed region. Thirdly, we propose an analysis of the two aspects of systemic risk (fragility or contagion) in the periods of the global financial crisis, European debt crisis and recently, during the economic stagnation period. The conclusions from the paper may serve as an important insight into how systemic risk changes with changing economic and financial markets’ condition and how it varies between different Central and East-Central European countries.