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Creditor Protection, Contagion, and Stock Market Price Volatility

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

Abstract

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.

Suggested Citation

  • 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.
    • Handle: RePEc:cpr:ceprdp:6658
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    More about this item

    Keywords

    Credit crunch; Probit estimation; Tobin q;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • G2 - Financial Economics - - Financial Institutions and Services

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