Article
Free trade and the efficiency of financial markets
Global Finance Journal
(2021)
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.
Keywords
- American depositary receipts,
- Economic growth,
- Financial markets,
- Free trade,
- rice efficiency
Disciplines
Publication Date
May, 2021
DOI
https://doi.org/10.1016/j.gfj.2020.100545
Citation Information
Ahmed S. Baig, Benjamin Blau and Nasim Sabah. "Free trade and the efficiency of financial markets" Global Finance Journal Vol. 48 (2021) Available at: http://works.bepress.com/nasim-sabah/7/