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The price of freedom: A Fama–French freedom factor

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  • Stocker, Marshall L.

Abstract

Economic institutions in-part explain cross-country variation in levels of investment and capital market characteristics. Here, country-level equity returns are related to cross-country differences in economic institutions as measured by an index of economic freedom. The ex-ante level and ex-post change in economic freedom are observed to be country-level equity return factors exhibiting Sharpe ratios greater than that of the value, momentum, and size factors, factors to which change in economic freedom has a low correlation. Fama–MacBeth regressions confirm the economic freedom factor. Finally, the excess return earned from investing in countries with low economic freedom is the price of freedom.

Suggested Citation

  • Stocker, Marshall L., 2016. "The price of freedom: A Fama–French freedom factor," Emerging Markets Review, Elsevier, vol. 26(C), pages 1-19.
    • Handle: RePEc:eee:ememar:v:26:y:2016:i:c:p:1-19
    DOI: 10.1016/j.ememar.2016.02.004
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    More about this item

    Keywords

    Asset pricing; economic freedom; Equity factor; Institutions; Fama MacBeth;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • H1 - Public Economics - - Structure and Scope of Government
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy
    • P5 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems

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