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Institutional quality, economic freedom and stock market volatility in the MENA region

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  • Tarek Ibrahim Eldomiaty
  • Tariq Bin Faisal Al Qassemi
  • Ahmed Fikri Mabrouk
  • Lamia Soliman Abdelghany

Abstract

How can a government help secure low-cost equity financing? This study offers an answer that a government can secure sustainable economic progress when policies of economic freedom are well institutionalized in a way that results in low equity volatility, thus low-cost equity financing. This study examines the quantitative and empirical associations between elements of Economic Freedom Index (being treated in this study as a proxy for institutional quality) and stock market volatility. The authors classify the institutional quality into three levels: high, medium and low. The data cover the years 1996–2014 for the MENA countries. The statistical tests include fixed and random effects, linearity versus non-linearity. The results show that stock market volatility can be mitigated and reduced when economic freedom is associated with an effective enforcement of law and efficient regulations. Nevertheless, the high freedom from corruption results in active equity trading which is associated with high volatility that leads in turn to high cost of equity financing. The study contributes to the literature in terms of offering practical insights on the pillars of economic freedom that policymakers must improve in order to mitigate or reduce equity volatility, therefore cost of equity financing.

Suggested Citation

  • Tarek Ibrahim Eldomiaty & Tariq Bin Faisal Al Qassemi & Ahmed Fikri Mabrouk & Lamia Soliman Abdelghany, 2016. "Institutional quality, economic freedom and stock market volatility in the MENA region," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 9(3), pages 262-283, September.
    • Handle: RePEc:taf:macfem:v:9:y:2016:i:3:p:262-283
    DOI: 10.1080/17520843.2015.1093011
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    Cited by:

    1. Kashif Islam & Ahmad Raza Bilal & Syed Anees Haider Zaidi, 2022. "Symmetric and asymmetric nexus between economic freedom and stock market development in Pakistan," Economic Change and Restructuring, Springer, vol. 55(4), pages 2391-2421, November.
    2. Pandey, Vivek & Steigner, Tanja & Sutton, Ninon K., 2023. "The value of economic freedom in cross-border mergers," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 540-563.

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