Institutional Weakness and Stock Price Volatility

36 Pages Posted: 27 Jul 2006

See all articles by Assaf Razin

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Galina Hale

University of California, Santa Cruz

Hui Tong

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2006

Abstract

We establish an empirical regularity that a weak creditor protection index is associated with high stock price volatility. Using a standard Tobin Q model we demonstrate two distinct mechanisms that are responsible for increased volatility: credit guarantees and weak creditor protection that tightens credit constraints. In a panel of OECD and non OECD countries we attempt to identify the effects of these distinct mechanisms on stock price volatility while taking explicit account of events of financial crises. We find that both mechanisms are responsible for the stock price volatility in the data.

Keywords: Credit guarantees, credit constraints, credit growth volatility, stock price volatility

JEL Classification: E30, F30, G20

Suggested Citation

Razin, Assaf and Hale, Galina and Tong, Hui, Institutional Weakness and Stock Price Volatility (April 2006). CEPR Discussion Paper No. 5651, Available at SSRN: https://ssrn.com/abstract=920869

Assaf Razin (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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Galina Hale

University of California, Santa Cruz ( email )

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Santa Cruz, CA 95064
United States

Hui Tong

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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