Free trade and the efficiency of financial markets

Ahmed S. Baig, Benjamin M. Blau, Nasim Sabah

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

Abstract

Prior research has found that countries with freer trade have a lower chance of extreme stock price movements. We develop and test the hypothesis that free trade can also improve the overall informational efficiency of financial markets. Using a broad sample of American Depositary Receipts (ADRs), we show that free trade has a positive association with the efficiency of stock prices. To alleviate endogeneity concerns and strengthen causal inferences we utilize two exogenous events that improved the levels of free trade in various home countries. A difference-in-difference analysis suggests that, relative to control stocks, the price efficiency of treated stocks increased after the liberalization of trade.

Original languageEnglish
Article number100545
JournalGlobal Finance Journal
Volume48
DOIs
StatePublished - May 2021

Keywords

  • American depositary receipts
  • Economic growth
  • Financial markets
  • Free trade
  • Price efficiency

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