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Institutional Weakness and Stock Price Volatility

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  • Galina Hale
  • Assaf Razin
  • Hui Tong

Abstract

We find an empirical regularity that stronger creditor protection reduces the volatility of stock market prices. We analyze two distinct mechanisms that characterize equity price volatility: government guarantees and creditor protection. Using a Tobin q model, we demonstrate that weak creditor protection that gives rise to government guarantees and tightens credit constraints, increases stock price volatility. Empirically, accounting for the probability of financial crises, we find that government guarantees and weak institutions that tighten credit constraints increase aggregated stock price volatility.

Suggested Citation

  • Galina Hale & Assaf Razin & Hui Tong, 2006. "Institutional Weakness and Stock Price Volatility," NBER Working Papers 12127, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:12127
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    Cited by:

    1. Razin, Assaf & Hale, Galina & Tong, Hui, 2007. "Creditor Protection and Stock Price Volatility," CEPR Discussion Papers 6540, C.E.P.R. Discussion Papers.
    2. Galina Hale & Assaf Razin & Hui Tong, 2009. "The impact of creditor protection on stock prices in the presence of credit crunches," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
    3. Razin, Assaf & Hale, Galina & 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, 2008. "Credit Crunch, Creditor Protection, and Asset Prices," Working Papers 162008, Hong Kong Institute for Monetary Research.
    5. Mr. Abbas Mirakhor & Mr. S. Nuri Erbas, 2007. "The Equity Premium Puzzle, Ambiguity Aversion, and Institutional Quality," IMF Working Papers 2007/230, International Monetary Fund.
    6. Razin, Assaf & Hale, Galina & Tong, Hui, 2007. "Credit Constraints and Stock Price Volatility," CEPR Discussion Papers 6310, C.E.P.R. Discussion Papers.

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    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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