Economic freedom and market resilience: Safeguarding liquidity in times of crisis

Abstract

This study examines the link between the liquidity of non-U.S. stocks listed on the NYSE and the economic freedom of their home countries, with a particular focus on the COVID-19 pandemic. The key hypothesis suggests that greater economic freedom enhances stock liquidity by reducing information asymmetry and transaction costs. The findings confirm that stocks from countries with higher economic freedom exhibit narrower bid-ask spreads, lower price impacts, and reduced information-based trading, indicating improved market efficiency. Additionally, the study finds that economic freedom played a crucial role in maintaining liquidity and market stability during the pandemic. Countries with stronger financial, investment, and trade freedom experienced smaller declines in liquidity, suggesting that regulatory flexibility and transparent financial systems helped mitigate the effects of external shocks. These results highlight the importance of economic freedom in fostering resilient financial markets and reducing market disruptions during crises. The study provides practical implications for policymakers, investors, and financial institutions by emphasizing the need to promote economic freedom through transparent regulations, investor protections, and efficient market structures. Ultimately, the research supports the idea that higher economic freedom not only enhances financial market efficiency in normal conditions but also acts as a stabilizing force in times of economic uncertainty and global crises.