IDEAS home Printed from https://ideas.repec.org/a/eee/glofin/v48y2021ics1044028319303333.html
   My bibliography  Save this article

Free trade and the efficiency of financial markets

Author

Listed:
  • Baig, Ahmed S.
  • Blau, Benjamin M.
  • Sabah, Nasim

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.

Suggested Citation

  • Baig, Ahmed S. & Blau, Benjamin M. & Sabah, Nasim, 2021. "Free trade and the efficiency of financial markets," Global Finance Journal, Elsevier, vol. 48(C).
    • Handle: RePEc:eee:glofin:v:48:y:2021:i:c:s1044028319303333
    DOI: 10.1016/j.gfj.2020.100545
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1044028319303333
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.gfj.2020.100545?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Feenstra, Robert C., 1996. "Trade and uneven growth," Journal of Development Economics, Elsevier, vol. 49(1), pages 229-256, April.
    2. Ben-David, Dan & Loewy, Michael B, 1998. "Free Trade, Growth, and Convergence," Journal of Economic Growth, Springer, vol. 3(2), pages 143-170, June.
    3. Kewei Hou & Tobias J. Moskowitz, 2005. "Market Frictions, Price Delay, and the Cross-Section of Expected Returns," The Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 981-1020.
    4. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(3), pages 717-737.
    5. Martin Lettau & Sydney C. Ludvigson, 2004. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," American Economic Review, American Economic Association, vol. 94(1), pages 276-299, March.
    6. Lubos Pástor & Pietro Veronesi, 2012. "Uncertainty about Government Policy and Stock Prices," Journal of Finance, American Finance Association, vol. 67(4), pages 1219-1264, August.
    7. Venkat R. Eleswarapu & Kumar Venkataraman, 2006. "The Impact of Legal and Political Institutions on Equity Trading Costs: A Cross-Country Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 1081-1111.
    8. repec:hal:spmain:info:hdl:2441/5571 is not listed on IDEAS
    9. Jean-Paul Fitoussi & David Jestaz & Edmund S. Phelps & Gylfi Zoega, 2000. "Roots of the Recent Recoveries: Labor Reforms or Private Sector Forces?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 237-311.
    10. Ben-David, Dan, 1996. "Trade and convergence among countries," Journal of International Economics, Elsevier, vol. 40(3-4), pages 279-298, May.
    11. Francisco L. Rivera-Batiz & Luis A. Rivera-Batiz, 2018. "Economic Integration and Endogenous Growth," World Scientific Book Chapters, in: Francisco L Rivera-Batiz & Luis A Rivera-Batiz (ed.), International Trade, Capital Flows and Economic Development, chapter 1, pages 3-32, World Scientific Publishing Co. Pte. Ltd..
    12. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
    13. repec:hal:wpspec:info:hdl:2441/5571 is not listed on IDEAS
    14. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers 3577, National Bureau of Economic Research, Inc.
    15. Ekkehart Boehmer & Juan (Julie) Wu, 2013. "Short Selling and the Price Discovery Process," The Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 287-322.
    16. Baldwin, Richard E, 1992. "Measurable Dynamic Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 162-174, February.
    17. Blau, Benjamin M., 2017. "Economic freedom and crashes in financial markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 33-46.
    18. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 369-405.
    19. John Lintner, 1964. "Optimal Dividends and Corporate Growth under Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 78(1), pages 49-95.
    20. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    21. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    22. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
    23. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    24. Edmund S. Phelps, 1999. "Behind This Structural Boom: The Role of Asset Valuations," American Economic Review, American Economic Association, vol. 89(2), pages 63-68, May.
    25. Blau, Benjamin M. & Brough, Tyler J. & Thomas, Diana W., 2014. "Economic freedom and the stability of stock prices: A cross-country analysis," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 182-196.
    26. Sassan Alizadeh & Michael W. Brandt & Francis X. Diebold, 2002. "Range‐Based Estimation of Stochastic Volatility Models," Journal of Finance, American Finance Association, vol. 57(3), pages 1047-1091, June.
    27. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    28. Grossman, Gene M. & Helpman, Elhanan, 1991. "Trade, knowledge spillovers, and growth," European Economic Review, Elsevier, vol. 35(2-3), pages 517-526, April.
    29. Graeff, P. & Mehlkop, G., 2003. "The impact of economic freedom on corruption: different patterns for rich and poor countries," European Journal of Political Economy, Elsevier, vol. 19(3), pages 605-620, September.
    30. Hasbrouck, Joel, 1993. "Assessing the Quality of a Security Market: A New Approach to Transaction-Cost Measurement," The Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 191-212.
    31. Hoon, Hian Teck & Phelps, Edmund S, 1992. "Macroeconomic Shocks in a Dynamized Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, vol. 82(4), pages 889-900, September.
    32. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    33. Dan Ben-David, 1993. "Equalizing Exchange: Trade Liberalization and Income Convergence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(3), pages 653-679.
    34. Phelps, Edmund S, 1992. "A Review of Unemployment," Journal of Economic Literature, American Economic Association, vol. 30(3), pages 1476-1490, September.
    35. Ekkehart Boehmer & Eric K. Kelley, 2009. "Institutional Investors and the Informational Efficiency of Prices," The Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3563-3594, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Aharon, David Y. & Baig, Ahmed S. & DeLisle, R. Jared, 2022. "The impact of government interventions on cross-listed securities: Evidence from the COVID-19 pandemic," Finance Research Letters, Elsevier, vol. 46(PA).
    2. Kong, Qunxi & Shen, Chenrong & Li, Rongrong & Wong, Zoey, 2021. "High-speed railway opening and urban green productivity in the post-COVID-19: Evidence from green finance," Global Finance Journal, Elsevier, vol. 49(C).
    3. Bai, Dongbei & Jain, Vipin & Tripathi, Mamta & Ali, Syed Ahtsham & Shabbir, Malik Shahzad & Mohamed, Mady A.A. & Ramos-Meza, Carlos Samuel, 2022. "Performance of biogas plant analysis and policy implications: Evidence from the commercial sources," Energy Policy, Elsevier, vol. 169(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Blau, Benjamin M., 2017. "Economic freedom and crashes in financial markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 33-46.
    2. Xuepeng Liu, 2009. "Trade and income convergence: Sorting out the causality," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 18(1), pages 169-195.
    3. Utku Utkulu & Durmus Özdemir, 2005. "Does Trade Liberalization Cause a Long Run Economic Growth in Turkey," Economic Change and Restructuring, Springer, vol. 37(3), pages 245-266, September.
    4. Connolly, Michelle, 1999. "North-South Technological Diffusion: A New Case for Dynamic Gains from Trade," Working Papers 99-08, Duke University, Department of Economics.
    5. Paul Handro & Bogdan Dima, 2024. "Analyzing Financial Markets Efficiency: Insights from a Bibliometric and Content Review," Journal of Financial Studies, Institute of Financial Studies, vol. 16(9), pages 119-175, May.
    6. Blau, Benjamin M. & Brough, Tyler J. & Thomas, Diana W., 2014. "Economic freedom and the stability of stock prices: A cross-country analysis," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 182-196.
    7. Sergio Ginebri & Giacomo Pietroli & Laura Sabani, 2001. "Financial Deepening, Trade Openness and Growth:a Multivariate Cointegrated Analysis of the Complementary Effects," Working Papers 62, Sapienza University of Rome, CIDEI.
    8. Aharon, David Y. & Baig, Ahmed S. & Jacoby, Gady & Wu, Zhenyu, 2024. "Greenhouse gas emissions and the stability of equity markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 92(C).
    9. Thanh Huong Nguyen, 2019. "Information and Noise in Stock Markets: Evidence on the Determinants and Effects Using New Empirical Measures," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 7-2019, January-A.
    10. Ahmed Nawaz Hakro & Bashir Ahmad Fida, 2009. "Trade and Income Convergence in Selected South Asian Countries and Their Trading Partners," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 14(2), pages 49-70, Jul-Dec.
    11. Kar Muhsin & Peker Osman & Kaplan Muhittin, 2008. "Trade Liberalization, Financial Development and Economic Growth in The Long Term: The Case of Turkey," South East European Journal of Economics and Business, Sciendo, vol. 3(2), pages 25-38, November.
    12. Fr餩ric Laurin, 2012. "Trade and regional growth in Spain: panel cointegration in a small sample," Applied Economics, Taylor & Francis Journals, vol. 44(4), pages 435-447, February.
    13. Henrekson, Magnus & Torstensson, Johan & Torstensson, Rasha, 1997. "Growth effects of European integration," European Economic Review, Elsevier, vol. 41(8), pages 1537-1557, August.
    14. Farmer, Roger E.A., 2012. "The stock market crash of 2008 caused the Great Recession: Theory and evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 693-707.
    15. Imen Mohamed Sghaier, 2023. "Trade openness, financial development and economic growth in North African countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1729-1740, April.
    16. Saïd Hanchane & Abdouni Abdeljabbar, 2004. "La dynamique de la croissance économique et de l'ouverture dans les pays en voie de développement : quelques investigations empiriques à partir des données de Panel," Working Papers halshs-00083720, HAL.
    17. Benjamin M Blau & Ryan J Whitby, 2017. "Range-based volatility, expected stock returns, and the low volatility anomaly," PLOS ONE, Public Library of Science, vol. 12(11), pages 1-19, November.
    18. Bos, J.W.B. & Economidou, C. & Koetter, M. & Kolari, J.W., 2010. "Do all countries grow alike?," Journal of Development Economics, Elsevier, vol. 91(1), pages 113-127, January.
    19. Jones, Larry E. & Manuelli, Rodolfo E., 1997. "The sources of growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 75-114, January.
    20. Long, N.V. & Wong, K.Y., 1996. "Endogenous Growth and International Trade: A Survey," Working Papers 96-07, University of Washington, Department of Economics.

    More about this item

    Keywords

    American depositary receipts; Economic growth; Financial markets; Free trade; Price efficiency;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F30 - International Economics - - International Finance - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:glofin:v:48:y:2021:i:c:s1044028319303333. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620162 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.