Evaluating Statistical and Economic Significance of Polish Stock Return Predictability

The purpose of this paper is to investigate the economic and statistical significance of Polish stock return predictability in the period 1997-2003. Using monthly data, the analysis is performed on 48 most liquid Polish stocks that are grouped into five equal-weighted sector portfolios. We focus on the predictive power of various lagged macroeconomic variables and interest rate for forecasting the portfolio returns. Using a simple dynamic trading strategy based on the maximum predictable portfolio (Lo and MacKinlay, 1997) we test, if it was possible to attain above average rate of return when adjusted for transaction costs. We find statistically significant stock return predictability but the economic significance cannot be established.