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Institutional Weakness and Stock Price Volatility

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  • Hale, Galina B
  • Razin, Assaf
  • Tong, Hui

Abstract

We establish an empirical regularity that a weak creditor protection index is associated with high stock price volatility. Using a standard Tobin Q model we demonstrate two distinct mechanisms that are responsible for increased volatility: credit guarantees and weak creditor protection that tightens credit constraints. In a panel of OECD and non OECD countries we attempt to identify the effects of these distinct mechanisms on stock price volatility while taking explicit account of events of financial crises. We find that both mechanisms are responsible for the stock price volatility in the data.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5651.

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Date of creation: Apr 2006
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Handle: RePEc:cpr:ceprdp:5651

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Keywords: credit constraints; credit growth volatility; credit guarantees; stock price volatility;

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References

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Citations

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Cited by:
  1. Abbas Mirakhor & S. Nuri Erbas, 2007. "The Equity Premium Puzzle, Ambiguity Aversion, and Institutional Quality," IMF Working Papers 07/230, International Monetary Fund.
  2. Galina Hale & Assaf Razin & Hui Tong, 2011. "The Impact of Creditor Protection on Stock Prices in the Presence of Credit Crunches," CESifo Working Paper Series 3440, CESifo Group Munich.
  3. Hale, Galina B & Razin, Assaf & Tong, Hui, 2008. "Creditor Protection, Contagion, and Stock Market Price Volatility," CEPR Discussion Papers 6658, C.E.P.R. Discussion Papers.
  4. Galina Hale & Assaf Razin & Hui Tong, 2007. "Credit Constraints and Stock Price Volatility," NBER Working Papers 13089, National Bureau of Economic Research, Inc.
  5. Galina Hale & Assaf Razin & Hui Tong, 2008. "Credit Crunch, Creditor Protection, and Asset Prices," Working Papers 162008, Hong Kong Institute for Monetary Research.
  6. Hale, Galina B & Razin, Assaf & Tong, Hui, 2007. "Creditor Protection and Stock Price Volatility," CEPR Discussion Papers 6540, C.E.P.R. Discussion Papers.

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