Economic Freedom and Crashes in Financial Markets

33 Pages Posted: 26 Dec 2015 Last revised: 1 Jan 2016

See all articles by Benjamin M. Blau

Benjamin M. Blau

Utah State University - Huntsman School of Business

Date Written: December 26, 2015

Abstract

Using a unique empirical approach that accounts for the possibility that financial market crashes are endogenously determined by market structures, this study examines how economic freedom contribute to crashes in financial markets. On one hand, economic freedom might provide an unregulated framework that contributes to the likelihood of crashes. On the other hand, economic freedom may mitigate regulatory uncertainty thus providing a level of transparency that reduces the likelihood of crashes. Results in this study provide strong support for the latter idea as countries with higher economic freedom experience lower probabilities of market crashes and more positive skewness in asset returns. A closer examination of the data suggest that the components of economic freedom that contribute most to the reduction in crash risk is the level of free trade and, to some extent, the strength of property right protection.

Keywords: Economic Freedom, Crashes, Skewness

Suggested Citation

Blau, Benjamin M., Economic Freedom and Crashes in Financial Markets (December 26, 2015). Available at SSRN: https://ssrn.com/abstract=2708493 or http://dx.doi.org/10.2139/ssrn.2708493

Benjamin M. Blau (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322
United States

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