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Free trade and the efficiency of financial markets

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  • 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
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    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

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