The Impact of Economic Freedom on the Stock Market Returns: Evidence from GCC Countries
DOI:
https://doi.org/10.35516/jjes.v12i1.2022Keywords:
Economic Freedom, Stock Market Return, Financial Market Performance, Fraser Institute, GCC countriesAbstract
Objectives: This research aims to provide a comprehensive and clear picture of the theoretical frameworks and empirical studies that have attempted to diagnose and analyze the mechanism and channels of the impact that economic freedom can exert in supporting stock market returns. This is followed by forecasting and constructing an objective quantitative model capable of highlighting the nature, value, and direction of this impact in the Gulf Cooperation Council (GCC) countries during the period (2006-2020).
Methods: The study adopted the Pooled Mean Group Autoregressive Distributed Lag (PMG-ARDL) methodology based on balanced panel data.
Results: The estimated results of the research revealed a consistency in the movement of economic freedom and its alignment with its overall index and its four sub-indices, which are government size, sound money, international trade freedom, and regulatory frameworks for credit, labor, and business, in relation to the movement of the stock market return index for the sample countries in the long term. Changes occurring in the first index are usually followed by changes in the second index in the same direction. However, this alignment and consistency did not manifest in its general form in the short term. The results also confirmed the inability of the legal system index and property rights to demonstrate an effective impact on stock market returns in the GCC countries, whether in the short term or long term.
Conclusion: To contribute to supporting the performance of stock markets and increasing their return rates, GCC countries—through their economic, financial, political, and legal authorities—must implement policies and programs that promote the principles of economic freedom and attempt to raise their rates to align with international standards.
References
Al-Amarneh, A. (2017). Economic freedom and investment efficiency in the MENA region. The Journal of Applied Business Research, 33(4), 843-952.
Ansari, M. S., & Gyasuddin, R. (2022). Does economic freedom influence the FDI-growth nexus in BRIBSASEAN economies? Indian Institute of Management, Kozhikode, Working Paper 11.
Arab Fund for Economic & Social Development. (n.d.). Arab Development Portal. Retrieved from https://data.arabdevelopmentportal.com/topics/Banking-and-Finance-0/International/Annual
Baier, S. L., Blance, M., & Dwyer, G. P., Jr. (2012). Banking crises and economic freedom. Federal Reserve Bank of Atlanta, Working Paper.
Beach, W. W., & Kane, T. (2008). Methodology: Measuring the 10 economic freedoms. Washington, DC: The Heritage Foundation.
Bekaert, G., Harvey, B. R., & Lundblad, B. (2005). Does financial liberalization spur growth? Journal of Financial Economics, 77, 3–55.
Bengoa, M., & Sanchez-Robles, B. (2003). Foreign direct investment, economic freedom and growth: New evidence from Latin America. European Journal of Political Economy, 19(3), 529-545.
Billmeier, A., & Massa, I. (2007). What drives stock market development in the Middle East and Central Asia—Institutions, remittances, or natural resources? IMF Working Papers, No. 7.
Bird, J. O., & Ross, T. F. (2015). Mechanical engineering principles (3rd ed.). Routledge, Inc.
Burgstahler, D., & Dichev, I. I. (1997). Earnings, adaptation, and equity value. The Accounting Review, 72(2), 187–215.
Chen, B. R., & Huang, Y. S. (2009). Economic freedom, equity performance, and market volatility. International Journal of Accounting and Information Management, 17(2), 189-197.
Chen, C.-Y., Chen, P., & Jin, Q. (2015). Economic freedom, investment flexibility, and equity value: A cross-country study. The Accounting Review, 90(5), 1839-1870.
Dell, G. A., Mauro, P., Faria, A., David, J., Di Giovanni, J., Schindler, M., Ayhan, K., & Terrones, M. (2008). Reaping the benefits of financial globalization. IMF Occasional Paper No. 264.
Dewandaru, G., Rizvi, S. A. R., Bacha, O. I., & Masih, M. (2014). What factors explain stock market retardation in Islamic countries? Emerging Markets Review, 19, 106-127.
Eldomiaty, T. I., Al Qassemi, T., Mabrouk, A., & Abdelghany, L. (2015). Institutional quality, economic freedom and stock market volatility in the MENA region. Macroeconomics and Finance in Emerging Market Economies, 9(3), 1-22.
Fraser Institute. (2023). Economic freedom index. Retrieved from fraserinstitute.org/Economic-freedom/dataset?geozone=world&year=2021&page=dataset&min-year=2&max-year=0&filter=0.
Gwartney, J., & Lawson, R. (2003). The concept and measurement of economic freedom. European Journal of Political Economy, 19(3), 405-430.
Gwartney, J., Robert, A. L., Joshua, B., Ryan, M., Simeon, D., & Fred, M. (2022). Economic freedom of the world: 2022 annual report. Fraser Institute. Vancouver, B.C.
Haan, J., Sturm, J. E., & Zandberg, E. (2009). The impact of financial and economic crises on economic freedom. In J. Gwartney & R. Lawson (Eds.), Economic freedom of the world 2009 annual report (pp. 25-36). Fraser Institute.
Hafer, R. W. (2013). Economic freedom and financial development: International evidence. Cato Journal, 33(1), 111-126.
Hao, S., Jin, Q., & Zhang, G. (2011). Investment growth and the relation between equity value, earnings, and equity book value. The Accounting Review, 86(2), 605–635.
Harvey, B. R. (1991). The world price of covariance risk. Journal of Finance, 46(1), 111–157.
Jegadeesh, N., & Titman, S. (1993). Returns to buying winners and selling losers: Implications for stock market efficiency. The Journal of Finance, 48(1), 65-91.
Koyuncu, B., & Unver, M. (2018). Is there a long-term relationship between imports and economic growth?: The case of Turkey. In VIII. IBANESS Congress Series – Plovdiv/Bulgaria (pp. 1-10). April 21-22, 2018.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1997). Legal determinants of external finance. Journal of Finance, 52(3), 1131-1150.
Lawson, R. A., & Roychoudhury, S. (2008). Economic freedom and equity prices among U.S. states. The Credit and Financial Management Review, 14(4), 25-35.
Li, K. (2002). What explains the growth of global equity markets? Canadian Investment Review, 15, 23-30.
Lombardo, D., & Pagano, M. (2000). Legal determinants of the return on equity. BSEF, Working Paper 24.
Luo, Y. (2014). Economic freedom, financial crisis and stock volatilities in emerging markets. International Journal of Financial Management, 4(1), 75-85.
Nadeem, M., Jun, Y., Akhtar, T., Dong, W., & Niazi, M. (2019). Does really economic freedom matter for growth in South Asia? Empirical evidence from pre-economic crises and post-economic crises period. Asian Economic and Financial Review, 9(1), 52-63.
Obstfeld, M. (2009). International finance and growth in developing countries: What have we learned? National Bureau of Economic Research, Working Paper No. w14691.
Panigrahi, A., Vachhani, K., & Sisodia, M. (2021). Application of discounted cash flow model valuation: The case of Exide Industries. Journal of Management Research and Analysis, 8(4), 1170-1179.
Pasaribu, R. B. (2019). Value at risk of momentum investment strategy: Indonesia's liquid stocks portfolio. Journal Manajemen Indonesia, 19(1), 30-45.
Pesaran, M. H., Shinn, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.
Quazi, R. (2007). Economic freedom and foreign direct investment in East Asia. Journal of the Asia Pacific Economy, 12(3), 329-344.
Rasiah, D., Ying, T. L., Solarin, S., & Sakiru, A. (2016). Economic freedom index and stock returns in Malaysia. Theoretical and Applied Economics, 13(1), 213-236.
Romeu, R., & Serajuddin, U. (2001). Technical analysis for direct access trading (1st ed.). McGraw-Hill, Inc.
Shah, M. H., Ullah, I., Ullah, A., Wang, N., Iqbal, K., Chun, H., & Zhang, K. (2024). Exploring the interwoven relationship: Property rights, financial freedom, government regulation, and stock market fluctuations in emerging economies - A novel system GMM perspective. Heliyon, 10, 2024.
Smimou, K., & Karabegovic, A. (2010). On the relationship between economic freedom and equity returns in the emerging markets: Evidence from the Middle East and North Africa (MENA) stock markets. Emerging Markets Review, 11(2), 119-151.
Stocker, M. L. (2005). Equity returns and economic freedom. Cato Journal, 25, 583-594.
Tag, M. N., Degirmen, S., & Saltik, O. (2016). Do institutions of economic freedom attract foreign direct investment? Evidence from panel data. Paper presented at the 20th Annual International Conference on Macro Economic Analysis and International Finance, Brete, Greece.
The World Bank. (n.d.). Global financial development database. Retrieved from
https://www.worldbank.org/en/publication/gfdr/data/global-financial-development-database.
Ullah, A., Anees, M., Ali, Z., & Khan, M. A. (2018). Economic freedom and private capital inflows in selected South Asian economies: A dynamic panel data evidence. South Asian Journal of Business and Management Cases, 7(1), 41–52.
Ullah, H., & Jan, S. (2020). Economic freedom on stock market performance and liquidity: Evidence from KSE-100 Index Pakistan. International Journal of Business and Management, 15(1), 110-126.
Ullah, H., Wahid, F., Mohmand, I. K. M., & Ali, A. (2019). Foreign portfolio investments and economic freedom: Empirical investigation of the world countries grouping based on the level of income. Review of Economics and Development Studies, 5(4), 827-845.
