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. 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.