Press freedom and jumps in stock prices

Sara Abed Masrorkhah and Thorsten Lehnert

Economic Systems, 2017, vol. 41, issue 1, 151-162

Abstract: Press freedom varies substantially across countries. In a free environment, any news immediately becomes public knowledge through mediums including various electronic media and published materials. However, in an unfree environment, (economic) agents would have more discretionary powers to disclose good news immediately, while hiding bad news or releasing bad news slowly. We argue that this discretion affects stock prices and that stock markets in countries with a free press should be better processors of economic information. Using an equilibrium asset-pricing model in an economy under jump diffusion, we decompose the moments of the returns of international stock markets into a diffusive risk and a jump risk part. Using stock market data for a balanced panel of 50 countries, our results suggest that in countries with a free press, the better processing of bad news leads to more frequent negative jumps in stock prices. As a result, stock markets in those countries are characterized by higher volatility, driven by higher jump risk and more negative return asymmetry. The results are robust to the inclusion of various controls for governance and other country- or market-specific characteristics. We interpret these as good stock market characteristics because a free press improves welfare and increases economic growth.

Keywords: Press freedom; News; Governance; Welfare; Jumps; Stock markets (search for similar items in EconPapers)
JEL-codes: G12 G15 Z13 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Press Freedom and Jumps in Stock Prices (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:41:y:2017:i:1:p:151-162

DOI: 10.1016/j.ecosys.2016.05.009

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