Introduction {Wladyslaw Milo and Piotr Wdowinski) ............... 9
Part One: Stock Market Modeling
1 The Foreign Exchange and the Market Microstracture of
the Polish Zloty (Stanisiaw Kluza and Andrzej Slawinski) .... 15
1.1 Introduction ........................................... 15
1.2 Macroeconomic Relations ................................ 17
1.3 Market Microstracture Modeling ......................... 22
1.4 Conclusions ............................................ 24
References .................................................. 24
2 Behavioral Finance and Its Applications on Decision-Making
in Financial Markets (Philippe De Brouwer) .................. 27
2.1. Cognitive Biases ....................................... 27
2.1.1 Some Questions .................................. 28
2.1.1.1 Confidence ............................. 28
2.1.1.2 Logical Deduction and Probabilities .... 28
2.1.1.3 Hindsight .............................. 28
2.1.1.4 Rational Feelings about Mistakes ....... 29
2.1.1.5 Rational Feelings about Close Misses ... 29
2.1.1.6 Rational and Independent Mind
Functioning ............................ 29
2.1.1.7 Expected Value ......................... 29
2.1.1.8 Rational Selection of Games with
Uncertain Outcome ...................... 29
2.1.1.9 Problem Solving Abilities .............. 30
2.1.1.10 Rational Choices ....................... 30
2.1.1.11 Free Choice ............................ 30
2.1.1.12 Rational Interpretation of News and
Evidence ............................... 30
2.1.1.13 Unbiased Perception of Reality ......... 31
2.1.2 And Answers ..................................... 31
2.1.2.1 Overconfidence ......................... 31
2.1.2.2 Hot Hand Fallacy / Confirmation Bias ... 32
2.1.2.3 Hindsight .............................. 33
2.1.2.4 Hindsight and Perceptive Difference
between Actions and Non-Actions ........ 33
2.1.2.5 Hindsight and Close Misses ............. 33
2.1.2.6 Anchoring .............................. 34
2.1.2.7 Non-Linear Appreciation of
Probabilities .......................... 34
2.1.2.8 Loss Aversion .......................... 35
2.1.2.9 Framing and Mental Accounting .......... 36
2.1.2.10 Labeling ............................... 37
2.1.2.11 Herding Behavior ....................... 37
2.1.2.12 Over- and Under-Reaction Related to
Confirming and Discon-firming
Evidence / Confirmation Bias ........... 38
2.1.2.13 Availability Bias ...................... 38
2.1.3. Impact of Cognitive Biases to Qur Ability to
Select Investments .............................. 38
2.2. Applications on Portfolio Optimization for Individual
Investors .............................................. 41
2.2.1 Portfolio Construction .......................... 41
2.2.2 Advice .......................................... 43
References .................................................. 44
3 Can the Dividend Yield Strategies Beat the Market?
Evidence from the Polish Stock Market 1994-2004 (Janusz
Brzeszczyński and Jerzy Gajdka) ............................. 45
3.1 Introduction ........................................... 45
3.2 Methodology ............................................ 46
3.3 Results ................................................ 48
3.3.1 Performance of the Portfolios of Highest
Dividends Yield and the Effect of
Diversification ................................. 48
3.3.2 Significance of Dividend Yields ................. 56
3.4 Conclusions ............................................ 58
References .................................................. 58
4 An Analysis of Some Stock Exchange Indexes in Relation to
Market Ratios (Waldemar Tarczynski and Malgorzata
Luniewska) .................................................. 61
4.1 Introduction ........................................... 61
4.2 Stock Indexes and Market Ratios on the Warsaw Stock
Exchange ............................................... 62
4.3 Conclusions ............................................ 70
References .................................................. 70
5 Investment Funds in Poland and Worldwide (Wieslaw Dębski) ... 71
5.1 Introductory Remarks ................................... 71
5.2 General Principles Guiding the Operation of
Investment Funds in Poland ............................. 72
5.3 The Open-end Investment Fund ........................... 73
5.4 Specialized Open-end Investment Fund ................... 74
5.5 Close-end Investment Fund .............................. 75
5.6 Special Types of Investment Funds ...................... 78
5.7 The Investment Funds Market in Poland and Worldwide .... 82
References .................................................. 86
Part Two: Bonds and Portfolio Selection
6 Bond Portfolio Immunization in Arbitrage Free Models
(Alina Kondratiuk-Janyska and Marek Kaluszka) ............... 89
6.1 Introduction ........................................... 89
6.2 Preliminary Notations .................................. 90
6.3 Maxmin Approach ....................................... 92
6.4 Bayesian Criterion ..................................... 94
6.5 Gamma-Maxmin Problem ................................... 96
6.6 Markowitz-Type Criterion ............................... 96
6.7 Remarks and Direction for Further Research ............. 98
6.8 Conclusions ........................................... 100
References ................................................. 100
7 Yield Rate on a Callable Zero-Coupon Bond (Joanna
Klimkowska) ................................................ 101
7.1 Preliminaries ......................................... 102
7.2 Principle of Callable Bond Valuation .................. 104
7.3 Yield Rate on a Callable Bond ......................... 106
7.4 Is a Callable Bond a Good Investment? ................. 109
References ................................................. 1ll
8 Risk-Return Profile of the Investors on the Polish
Treasury Bond Market (Marcin Stamirowski) .................. 113
8.1 Introduction .......................................... 113
8.2 The Dataset ........................................... 114
8.3 Risk of the Portfolios ................................ 115
8.3.1 Duration ....................................... 115
8.3.2 VaR ............................................ 116
8.3.3 Variance Decomposition ......................... 118
8.4 Implied Views from the Portfolios ..................... 119
8.4.1 Motivation ..................................... 119
8.4.2 The Sharpe (2002) Model ........................ 120
8.4.3 Results of Empirical Application ............... 121
8.5 Conclusions ........................................... 123
Appendix A: Variance Decomposition - An Algorithm .......... 124
Appendix B: Variance Decomposition of Bond Portfolios ...... 125
References ................................................. 128
9 R&D Portfolio Selection Based on Conditional Stochastic
Dominance (Grażyna Trzpiot) ................................ 129
9.1 Introduction .......................................... 129
9.2 Stochastic Dominance Rules in Portfolio Selection ..... 130
9.3 Model Based on Conditional Stochastic Dominance ....... 131
9.4 Applying the Model to the Artificial-Project R&D
Portfolio ............................................. 132
9.5 Applying the Model to the WSE R&D Portfolio ........... 136
9.6 Conclusions ........................................... 138
Appendix ................................................... 138
References ................................................. 139
Part Three: Long-Run Exchange Rate and Interest Rate Modeling
10 Notes on Forecasting Real Equilibrium Exchange Rates of
PLN against USD (Wladyslaw Milo and Magdalena
Rutkowska) ................................................. 143
10.1 Introduction .......................................... 143
10.2 Theoretical Grounds of Real Equilibrium Exchange
Rates ................................................. 144
10.2.1 Balance of Payments Theory of Real Exchange
Rate (BOPRER) .................................. 144
10.2.2 The Monetary Extension of PPP Theory (MRER) .... 146
10.2.3 Fundamental Equilibrium Real Exchange Rate
(FERER) ........................................ 147
10.2.4 Behavioral Equilibrium Real Exchange Rates
(BERER) ........................................ 149
10.3 Empirical Results ..................................... 150
10.4 Conclusions ........................................... 153
References ................................................. 154
11 Modeling and Forecasting Exchange Rates: A Monetary
Approach (Piotr Wdowiński and Aneta Zglińska-Pietrzak) ..... 155
11.1 Introduction .......................................... 155
11.2 Literature Overview ................................... 156
11.3 The Monetary Exchange Rate Model ...................... 160
11.4 Empirical Results of Cointegration Approach ........... 162
11.5 Concluding Remarks .................................... 169
References ................................................. 169
12 Determinants of Exchange Rate of Slovak Crown Against
Polish Zloty - Dornbusch Monetary Model {Eva Rublikova
and Magdalena Rutkowska) ................................... 173
12.1 Introduction .......................................... 173
12.2 Sticky Price Monetary Model and Its Reduced Forms ..... 173
12.3 Unit Root Tests ....................................... 176
12.4 Estimation of Reduced Forms of Monetary Model ......... 178
12.5 Conclusions ........................................... 184
References ................................................. 185
13 Exchange Rate Modeling - A Fundamental Analysis for
Poland (Kazimierz Krauze) .................................. 187
13.1 Introduction .......................................... 187
13.2 Basic Theories and Hypotheses ......................... 188
13.2.1 Purchase Power Parity (PPP) Theory and
Interest Rate Parity (IRP) Theory .............. 188
13.2.2 Asset Market Model (AMM) and Balance of
Payment Model (BPM) ............................ 189
13.3 Empirical Analysis .................................... 189
13.4 Conclusions ........................................... 194
Appendix ................................................... 195
References ................................................. 201
14 Interbank Market under the Currency Board: Case of
Lithuania {Marius Jurgilas) ................................ 203
14.1 Introduction .......................................... 203
14.2 Institutional Framework ............................... 205
14.3 Data and the Econometric Model ........................ 206
14.4 Estimation Results .................................... 208
14.4.1 End and Beginning of the Reserve Maintenance
Period Effect .................................. 208
14.4.2 Reserve Deficiency ............................. 210
14.4.3 Treasury Activity ............................. 211
14.4.4 Other Effects .................................. 211
14.5 Conclusions ........................................... 211
Appendix ................................................... 213
References ................................................. 217
Part Four: Financial Markets and Macroeconomic Issues
15 Macroeconomic Effects of a Monetary Union Enlargement:
Theoretical Analysis in the Framework of Linear-Quadratic
Differential Games {Joseph Plasmans, Jacob Engwerda, Bas
van Aarle and Tomasz Michalak) ............................. 221
15.1 Introduction .......................................... 221
15.2 The Basic Economic Framework .......................... 224
15.3 General Aspects of Accession .......................... 227
15.4 Numerical Solutions of the Model ...................... 229
15.4.1. General Setup ................................. 229
15.4.2 Pre-Accession Stage, Symmetric Model ........... 232
15.4.3 Post-Accession Stage, Symmetric Model .......... 233
15.4.4 Asymmetries in Economic Structures and
Shocks ......................................... 233
15.4.5 Effects of Accession ........................... 235
15.5 Conclusions ........................................... 239
Appendix A ................................................. 240
References ................................................. 242
16 Monetary and Fiscal Policies for Slovenia on the Road
to Full Monetary Integration (Klaus Weyerstrass) ........... 245
16.1 Introduction .......................................... 245
16.2 The Macroeconometric Model SLOPOL ..................... 246
16.3 Economic Policy Instruments ........................... 248
16.4 The Simulation Design ................................. 249
16.5 Simulations without a Cut in the Tax Wedge ............ 250
16.6 Simulations with a Cut in the Tax Wedge ............... 251
16.7 Conclusions ........................................... 254
Appendix: Simulation Results ............................... 254
References ................................................. 256
17 Measuring Human Capital in Poland [Grzegorz Szafrański) .... 257
17.1 Human Capital Concept ................................. 257
17.2 Measurement Problems .................................. 259
17.3 The Human Capital Measures for Polish Economy ......... 263
17.4 Conclusions ........................................... 269
References ................................................. 270
18 Europe of One Price? (Jakub Kowalski) ...................... 273
18.1 Introduction .......................................... 273
18.2 Theoretical Background ................................ 274
18.2.1 Law of One Price, Purchasing Power Parity and
National Price Level ........................... 274
18.2.1.1 Law of One Price and Purchasing
Power Parity .......................... 274
18.2.1.2 Price Level Comparison ................ 276
18.2.2 Convergence .................................... 277
18.3 Econometric Approach .................................. 278
18.3.1. Data .......................................... 279
18.4 Results ............................................... 280
18.5 Concluding Remarks .................................... 286
References ................................................. 287
|
