The price of freedom: A Fama-French freedom factor

摘要

Economic institutions in-part explain cross-country variation in levels of investment and capital market characteristics. Here, country-level equity returns are related to cross-country differences in economic institutions as measured by an index of economic freedom. The ex-ante level and ex-post change in economic freedom are observed to be country level equity return factors exhibiting Sharpe ratios greater than that of the value, momentum, and size factors, factors to which change in economic freedom has a low correlation. Fama-MacBeth regressions confirm the economic freedom factor. Finally, the excess return earned from investing in countries with low economic freedom is the price of freedom. (C) 2016 Elsevier B.V. All rights reserved.