Freedom of Choice and Liquidity Co-movement

Abstract

We develop freedom of choice indices for 46 countries and test its influence on systematic liquidity co-movements. Country-specific indices reflect the impacts of three aspects of freedom of choice: (i) opportunity, (ii) decisional autonomy and (iii) immunity from interference. We find that countries promoting and institutionalizing individual opportunities for freedom of choice, with minimal government interference, experience lower country-specific systematic liquidity co-movements. Our results further document that all the three aspects of freedom of choice are important for reducing stock systematic liquidity risk. As robustness tests, we apply different delineations of liquidity co-movement, finding that results are robust to alternative freedom of choice definitions and model specifications.

Keywords: Freedom of choice, investor autonomy, liquidity co-movement, systematic liquidity risk

JEL Classification: G04, G14, G15, G18, G41