Benchmarking a Transition Economy Capital Market

Abstract

As the centrally planned communist nations of Central Europe lacked liquid and efficient capital markets,financial systems architecture became instrumental to their transition into market economies. Now, afteralmost 17 years of operations, it is time to take a snapshot of one of these economies and compare it to a welldeveloped capital market. This study is the first to provide a quantifiable comparison of the quality of thecapital markets of a fully developed and a transition economy; namely Euronext France [Euronext] and theWarsaw Stock Exchange [WSE]. Using intraday data for the Euronext market and the WSE it is shown thatwhile overall liquidity is certainly much greater in Euronext, range based intra-day volatility is significantlylower in the WSE. For stocks with the highest market capitalisation the WSE has lower transaction costs inthe first [largest] decile than Euronext. These results indicate that while the established market is significantlymore liquid in terms of average trade size and trade numbers it does not always offer lower transaction costsor volatility. This is a new result as most contributions to the literature argue that an emerging market within atransition economy will suffer from excess volatility.

Keywords

• Transition Economy
• Market Microstructure
• Emerging Markets
• Warsaw Stock Exchange
• Euronext