Institutional Weakness and Stock Price Volatility
36 Pages Posted: 27 Jul 2006
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Institutional Weakness and Stock Price Volatility
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: Suggested Citation
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