Creditor Protection, Contagion, and Stock Market Price Volatility

Assaf Razin, Galina Hale and Hui Tong

No 6658, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study a mechanism through which strong creditor protection affect positively the level, and negatively the volatility, of the aggregate stock market price. In a Tobin-q model with liquidity and productivity shocks, two channels are at work: (1) Creditor protection raises the stock value in a credit-constraint regime; (2) Creditor protection lowers the probability of the credit crunch. We confront the key predictions of the model to a panel of 40 countries over the period from 1984 to 2004. We find support to the hypothesis that creditor protection have a positive effect on the level, and a negative effect of the volatility, of stock prices, via the negative effect of the creditor protection on the probability of credit crunch.

Keywords: Credit crunch; Probit estimation; Tobin q (search for similar items in EconPapers)
JEL-codes: E1 G2 (search for similar items in EconPapers)
Date: 2008-01
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-mac
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