Credit Constraints and Stock Price Volatility
31 Pages Posted: 27 Jun 2007 Last revised: 8 Oct 2022
There are 2 versions of this paper
Credit Constraints and Stock Price Volatility
Credit Constraints and Stock Price Volatility
Date Written: May 2007
Abstract
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.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Balance Sheet Effects, Bailout Guarantees and Financial Crises
By Martin Schneider and Aaron Tornell
-
Hedging and Financial Fragility in Fixed Exchange Rate Regimes
By A. Craig Burnside, Martin Eichenbaum, ...
-
By Francis E. Warnock and John D. Burger
-
By John D. Burger and Francis E. Warnock
-
Emerging Local Currency Bond Markets
By John D. Burger, Francis E. Warnock, ...
-
Why Do Emerging Market Economies Borrow in Foreign Currency?
-
Foreign Participation in Local Currency Bond Markets
By John D. Burger and Francis E. Warnock
-
Foreign Participation in Local-Currency Bond Markets
By Francis E. Warnock and John D. Burger
-
A Corporate Balance Sheet Approach to Currency Crises
By Philippe Aghion, Abhijit V. Banerjee, ...