Economic Freedom, Financial Crisis and Stock Volatilities in Emerging Markets

This paper explores how equity market volatility are related with the Index of Economic Freedom for 22 emerging countries over 1995-2010 by considering the impacts of financial crisis. Consistent with theory, we find the overall economic freedom index and it components exert significant impacts on equity market volatility. Specifically, the index components within the categories of regulatory efficiency (such as business freedom and monetary freedom) and limited government (fiscal freedom, and government spending) exhibit strong significant explaining powers to the stock market volatilities. However, the other index components within the categories of rule of law and open markets are not significant. In addition, the stock market volatilities are significantly higher when the country confronts either one of the currency crisis, inflation crisis, stock market crash, domestic sovereign debt crisis, external sovereign debt crisis, or banking crisis. The results are consistent across different levels of inflation and wealth in emerging markets