Multifactor explanations of returns on the Warsaw Stock Exchange in light of the ICAPM

This paper presents possibilities for the pricing of stocks listed on the Warsaw Stock Exchange in light of the ICAPM. The pricing test period (1996-2010) is divided into two sub-periods: 1996-2005 (the years preceding Poland's accession to the EU) and 2005-2010 (the years of Poland's membership in the EU). The algorithm for the description of returns combines previous research by Fama and French with the author's own considerations. The proposed model factors are defined based on Fama and French (1993, 1995, 1996). Consideration of local pricing boundary conditions of the Polish market and modification of the Fama-French model allow one to determine changes to components of systematic risk and risk premium. Based on the proposed procedure, the results offer additional investment recommendations apart from the Fama-French model. The distributions of systematic risk components are similar in the two tested periods; however, the values of risk premium components changed during Poland's membership in the EU. Using the Fama-French model and the proposed modification, this research leads to a number of conclusions that may be useful for investors and portfolio managers.

► I model the pricing of stocks listed on the Warsaw Stock Exchange. ► The algorithm combines research by Fama and French with the author's own considerations. ► The results offer additional investment recommendations apart from the Fama-French model. ► The risk components do not differ considerably before and after Poland's accession to the EU. ► The risk premium components changed during Poland's membership in the EU.