Research underlines positive impact of press freedom on stock markets – Phys.Org

April 20, 2017 Author Prof Thorsten Lehnert. Credit: Michel Brumat / University of Luxembourg

In one of the first studies to assess the relationship between a country's Press Freedom Index and its stock market characteristics, researchers at the University of Luxembourg have highlighted how press freedom is linked to stock market volatility, and why this is beneficial for the overall economy.

In their paper "Press Freedom and Jumps in Stock Prices" published in Economic Systems, Prof. Thorsten Lehnert and PhD candidate Sara Abed Masror Khah from the Luxembourg School of Finance conclude that the free circulation of information in a country can lead to more volatile stock prices due to more frequent price jumps. At the same time however, countries with greater press freedom are known to experience more economic growth.

The authors analysed the relationship between press freedom, measured by the Press Freedom Index (PFI) published annually by Reporters without Borders, and stock market characteristics, using data from a balanced panel of 50 countries.

In "free" environments, news and information are broadly available and are picked up immediately by markets. This leads economic agents, such as households, companies, investors or politicians, to become better processors of information. On the other hand, in "unfree" environments, in which governments usually have tight control on the media, economic news can be withheld or their dissemination delayed leading to fewer sudden impacts on the stock market.

Policymakers "should encourage independent and fair press"

However, press restriction is not in fact positive for the overall economy. As Prof. Lehnert explains: "Press freedom in a country contributes positively to what economists would call the 'good' volatility of stock markets. This refers for instance to conditions that make it advantageous for firms to take risks that is necessary to greater economic growth. This is why it should certainly not be understood as an argument to reduce the freedom of press. On the contrary, freedom of press creates more welfare and economic growth."

Prof. Lehnert and Sara Abed Masror Khah also refer to an interesting relationship between press freedom and economic crises. Several member states of the European Union have seen their PFI ranking drop significantly since the 2008 financial crisis. Greece, for example, dropped 64 places between 2009 and 2013, when it fell on the 99th position of 180 countries assessed. Hungary, too, saw its PFI drop by 41 places, from 25 in 2009 to 64 in 2013. Luxembourg, on the other hand, a politically stable country, which was less affected by the crisis, initially ranked 20th in 2009, but steadily improved its ranking to 4th place in 2013.

"Despite creating some volatility on stock markets, a free press is not only good for the overall economy but is an essential part of democratic societies and policymakers should encourage an independent and fair press", concludes Prof. Lehnert.

Explore further: New approach predicts price trends in the stock options market

More information: Sara Abed Masrorkhah et al, Press freedom and jumps in stock prices, Economic Systems (2017). DOI: 10.1016/j.ecosys.2016.05.009

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Research underlines positive impact of press freedom on stock markets - Phys.Org