reedom of the press is linked to stock market volatility and can benefit the overall economy, according to researchers at the University of Luxembourg.
In a study led by a professor and PhD student from the university’s school of finance, research shows the free circulation of information in a country can lead to more volatile stock prices due to more frequent price jumps.
And countries with greater press freedom are known to experience more economic growth.
Professor Thorsten Lehnert and PhD student, Sara Abed Masror Khah, analysed the relationship between freedom of the press – measured by the Press Freedom Index (PFI) – and stock market characteristics, using data from a balanced panel of 50 countries.
Markets pick up on news
Prof. Lehnert said: “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 are 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.”
In “free” environments, the widespread of news means economic agents, such as households, companies, investors or politicians have immediate access to news and become better processors of information.
In “unfree” environments where governments often have tight control over the media, economic news can be withheld or their dissemination delayed leading to fewer sudden impacts on the stock market.
‘Policymakers should encourage independent, fair press’
A number of European Union member states have seen their PFI ranking drop significantly since the 2008 financial crisis.
According to the report, Greece dropped 64 places between 2009 and 2013, when it fell to 99th place out of 180 countries assessed. Hungary also saw its PFI drop by 41 places – from 25 in 2009 to 64 in 2013.
Luxembourg — a politically stable country — which was less affected by the crisis, initially ranked 20th in 2009, but steadily improved its ranking to fourth place in 2013.
Prof. Lehnert added: “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.”