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Free trade and the efficiency of financial markets

Ahmed S. Baig, Benjamin M. Blau and Nasim Sabah

Global Finance Journal, 2021, vol. 48, issue C

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; Price efficiency (search for similar items in EconPapers)
JEL-codes: F10 F30 G14 G15 O10 P51 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:48:y:2021:i:c:s1044028319303333

DOI: 10.1016/j.gfj.2020.100545

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