Investment Opportunities in the WSE: Bull Versus Bear Markets

This paper investigates how mispriced equity in emerging economies is. To do so, we test for abnormal excess returns using classic and modern asset pricing models. We document that size, investment, and momentum effects are not unequivocal enough to advertise them as trading opportunities. Abnormal returns of profitability and value anomalies are statistically and economically significant and they are persistent throughout different investment climates. Further, we report higher degree of mispricing at an aggregated level, and thus higher abnormal investment opportunities, in the period of bear market and stable macro-conditions (2000–2006) than during and after the recent global financial crisis (2007–2013). We advocate that in emerging stock markets, like the Warsaw Stock Exchange, investors’ asset pricing skills outweigh the effect of international portfolio rebalancing in the process of asset pricing. Investors might benefit from acknowledging these findings in formulating their investment policies. For instance, they may consider switching towards less aggressive portfolio allocations during bear markets.