Freedom of Choice Impact on Country-Specific Liquidity Commonality

56 Pages Posted: 30 Nov 2017 Last revised: 9 Jul 2024

See all articles by Pawan Jain

Pawan Jain

West Virginia University

Mohamed A. Mekhaimer

St. John Fisher University

Ronald W. Spahr

University of Memphis - Finance

Mark Sunderman

University of Memphis

Date Written: February 19, 2024

Abstract

We use three facets of freedom of choice (opportunity, decisional autonomy, and immunity from interference) to develop a freedom of choice index for 46 countries and test its impact on commonality in liquidity. We find that the three aspects of individual freedom of choice are negatively related to country-specific market liquidity commonality. Building on Sen’s (1993) theoretical framework, we document that in the presence of opportunities for making independent choices, immunity from encroaching activities, and decisional autonomy, investors tend to show less correlated trading decisions, measured by the levels of liquidity co-movement. To address possible endogeneity bias, we use 9/11 and country-level terrorist attacks as an exogenous source of variations to personal freedom of choice. We find that higher levels of perceived threats in a country restrain personal freedoms and tend to reduce freedom of choice effects on liquidity commonality. Our results are robust to alternative explanations, 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

Suggested Citation

Jain, Pawan and Mekhaimer, Mohamed A. and Spahr, Ronald W. and Sunderman, Mark, Freedom of Choice Impact on Country-Specific Liquidity Commonality (February 19, 2024). Available at SSRN: https://ssrn.com/abstract=3076533

Pawan Jain

West Virginia University ( email )

PO Box 6025
Morgantown, WV 26506
United States

Mohamed A. Mekhaimer (Contact Author)

St. John Fisher University ( email )

3690 East Avenue
Rochester, NY 14618
United States

Ronald W. Spahr

University of Memphis - Finance ( email )

United States

Mark Sunderman

University of Memphis ( email )

United States

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