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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12127.

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Date of creation: Mar 2006
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Handle: RePEc:nbr:nberwo:12127

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Citations

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Cited by:
  1. Hale, Galina B & Razin, Assaf & Tong, Hui, 2007. "Creditor Protection and Stock Price Volatility," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6540, C.E.P.R. Discussion Papers.
  2. Abbas Mirakhor & S. Nuri Erbas, 2007. "The Equity Premium Puzzle, Ambiguity Aversion, and Institutional Quality," IMF Working Papers 07/230, International Monetary Fund.
  3. Galina Hale & Assaf Razin & Hui Tong, 2011. "The impact of creditor protection on stock prices in the presence of credit crunches," Working Paper Series, Federal Reserve Bank of San Francisco 2011-13, Federal Reserve Bank of San Francisco.
  4. Galina Hale & Assaf Razin & Hui Tong, 2008. "Credit Crunch, Creditor Protection, and Asset Prices," Working Papers, Hong Kong Institute for Monetary Research 162008, Hong Kong Institute for Monetary Research.
  5. Hale, Galina B & Razin, Assaf & Tong, Hui, 2008. "Creditor Protection, Contagion, and Stock Market Price Volatility," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6658, C.E.P.R. Discussion Papers.
  6. Galina Hale & Assaf Razin & Hui Tong, 2007. "Credit Constraints and Stock Price Volatility," NBER Working Papers 13089, National Bureau of Economic Research, Inc.

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