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Credit Constraints and Stock Price Volatility

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

Abstract

This paper addresses how creditor protection affects the volatility of stock market prices. Credit protection reduces the probability of oscillations between binding and non-binding states of the credit constraint; thereby lowering the rate of return variance. We test this prediction of a Tobin’s q model, by using cross-country panel regression on stock price volatility in 40 countries over the period from 1984 to 2004. Estimated probabilities of a liquidity crisis are used as a proxy for the probability that credit constraints are binding. We find support for the hypothesis that institutions that help reduce the probability of oscillations between binding and non-binding states of the credit constraint also reduce asset price volatility.

Suggested Citation

  • Hale, Galina B & Razin, Assaf & Tong, Hui, 2007. "Credit Constraints and Stock Price Volatility," CEPR Discussion Papers 6310, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6310
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    References listed on IDEAS

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    More about this item

    Keywords

    binding credit constraints; liquidity crises; Tobin-q investment model;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F3 - International Economics - - International Finance
    • G0 - Financial Economics - - General

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