Press Freedom and Jumps in Stock Prices

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. In this paper, 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. Hence, we empirically investigate the relationship between press freedom and the occurrence of jumps in international stock markets. 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 and jump part. Using stock market data for a balanced panel of 50 countries, we show that in an economy with a free press, the better processing of bad news leads to more frequent negative jumps. As a result, stock markets in those countries are characterized by higher volatility and negative return asymmetry. Interestingly, once we decompose overall stock market volatility into a diffusive part and a jump component, our findings suggest that press freedom affects primarily the jump risk part. Results are robust to the inclusion of various controls for governance and other country- or market-specific characteristics. In order to interpret our findings, one has to evaluate their welfare implications. High volatility and negative return asymmetry can result from factors that decrease welfare as well as from factors that increase welfare. Since press freedom can be associated with greater welfare and increased economic growth, the higher volatility and negative return asymmetry that we find for countries with a free press should be interpreted as good stock market characteristics.