Regulation of the Warsaw Stock Exchange: The portfolio allocation problem

The paper analyses the risk reduction effect of limits which are imposed on stock exchange price movements. As a result of the maximisation of traders' utility functions subject to expected price constraints, a model similar to the capital asset pricing model (CAPM) is developed, where the observed returns are corrected for the appearance of constraints. An analysis of returns from six securities traded on the Warsaw Stock Exchange has been carried out. The models have been estimated by the two-limit Tobit model and compared with the results for the corrected returns. The results show that the trade barriers increase the portfolio risk. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: G12.