Economic Freedom and the Stability of Stock Prices: A Cross-Country Analysis

29 Pages Posted: 17 May 2013  

Benjamin M. Blau

Utah State University - Huntsman School of Business

Tyler Brough

Utah State University

Diana Weinert Thomas

Creighton University

Date Written: May 16, 2013

Abstract

This paper investigates the linkage between macroeconomic factors and the price stability of individual securities in a unique setting. Using a large sample of 327 American Depositary Receipts (ADRs), we test whether economic freedom in the ADR home country reduces the level of ADR volatility. Our tests show an important inverse relation between home-country economic freedom and ADR volatility indicating that an increase in the level of economic freedom in the home country improves the stability of ADR prices. We find that the direct relation between economic freedom and price stability is driven primarily by certain components of economic freedom, such as property right protection, the soundness of the money, and the level of free trade in the home country. Further, we find some evidence that less regulation and less government control of markets in the home country leads to more stable ADR prices.

Keywords: ADRs, Economic Freedom, Volatility

Suggested Citation

Blau, Benjamin M. and Brough, Tyler and Thomas, Diana Weinert, Economic Freedom and the Stability of Stock Prices: A Cross-Country Analysis (May 16, 2013). Available at SSRN: https://ssrn.com/abstract=2266075 or http://dx.doi.org/10.2139/ssrn.2266075

Benjamin M. Blau (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322
United States

Tyler Brough

Utah State University ( email )

Logan, UT 84322
United States

Diana Weinert Thomas

Creighton University ( email )

2500 California Plaza
Omaha, NE 68178
United States

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