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Institutional Weakness and Stock Price Volatility

  • Galina Hale
  • Assaf Razin
  • Hui Tong

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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