Asset Pricing in Emerging Capital Markets: Stock Returns, Trading Volume, and Returns Volatility

In this thesis, I investigate diverse aspects of capital market efficiency in selected emerging markets. In chapter 2, the focus of analysis is on the role of trading volume and capitalisation in the process of information absorption by the stock prices. Empirical analysis is conducted for stocks listed on the Warsaw Stock Exchange (WSE) and it can be shown that stocks with higher trading volume and larger capitalisation adjust to common information quicker than their low volume, small capitalisation counterparts. In chapter 3, a dynamic relationship between trading volume and subsequent stock returns is investigated. The results are interpreted in light of existing theoretical models. It is argued that empirical evidence indicates that most of the trades on the WSE are conducted due to liquidity needs or changing preferences of investors, and are not driven by arrivals of private information. The impact of institutional investors on market efficiency is investigated in chapter 4. This analysis is based on diverse theoretical models, most of which arguing that institutional trading deteriorates market efficiency by increasing autocorrelation in stock returns. However, an empirical investigation conducted for WSE stocks traded most intensively by pension funds reveals that the impact of institutional trading on market efficiency is beneficial. Namely, stocks traded by institutions are characterised by lower autocorrelation than the remaining ones, which indicates their quicker adjustment to news and, hence, higher efficiency. Last, we analyse international financial spillovers in chapter 4. For the US and eight Asian markets, it is investigated whether, and to what extent, news originating in one country are incorporated into security prices abroad. The main result of this empirical work is that the US market leads the Asian ones. However, under certain conditions such as exceptionally high volatility or low returns, Asian markets might exert significant influence on the behaviour of the US market. This phenomenon can also be interpreted as evidence of financial contagion.