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Creditor Protection, Contagion, and Stock Market Price Volatility

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

We study a mechanism through which strong creditor protection affect positively the level, and negatively the volatility, of the aggregate stock market price. In a Tobin-q model with liquidity and productivity shocks, two channels are at work: (1) Creditor protection raises the stock value in a credit-constraint regime; (2) Creditor protection lowers the probability of the credit crunch. We confront the key predictions of the model to a panel of 40 countries over the period from 1984 to 2004. We find support to the hypothesis that creditor protection have a positive effect on the level, and a negative effect of the volatility, of stock prices, via the negative effect of the creditor protection on the probability of credit crunch.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6658.

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Date of creation: Jan 2008
Handle: RePEc:cpr:ceprdp:6658
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