Economic Freedom and the Stability of Stock Prices: A Cross-Country Analysis
29 Pages Posted: 17 May 2013
Date Written: May 16, 2013
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
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