The Determinants of CoCo Bond Prices

in Journal of Derivatives (2019)

PRESS FREEDOM AND JUMPS IN STOCK PRICES

E-print/Working paper (2016)

Press freedom varies substantially across countries. In a free environment, any news becomes immediately public knowledge through mediums including various electronic media and published materials ... [more ▼]

Press freedom varies substantially across countries. In a free environment, any news becomes immediately public knowledge through mediums including various electronic media and published materials. However, in an unfree environment, (economic) agents would have more discretionary power to disclose good news immediately, while hiding bad news or releasing bad news slowly. We argue that this discretion is affecting stock prices and 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 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 the higher jump risk, and more negative return asymmetry. Results are robust to the inclusion of various controls for governance and other country- or market-specific characteristics. We interpret this as good stock market characteristics, because a free press improves welfare and increases economic growth. [less ▲]