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Credit Constraints and Stock Price Volatility

Listed author(s):
  • Galina Hale
  • Assaf Razin
  • Hui Tong

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.

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File URL: http://www.nber.org/papers/w13089.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13089.

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Date of creation: May 2007
Handle: RePEc:nbr:nberwo:13089
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