Institutional Weakness and Stock Price Volatility

Galina Hale, Assaf Razin and Hui Tong

No 12127, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We find an empirical regularity that stronger creditor protection reduces the volatility of stock market prices. We analyze two distinct mechanisms that characterize equity price volatility: government guarantees and creditor protection. Using a Tobin q model, we demonstrate that weak creditor protection that gives rise to government guarantees and tightens credit constraints, increases stock price volatility. Empirically, accounting for the probability of financial crises, we find that government guarantees and weak institutions that tighten credit constraints increase aggregated stock price volatility.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2006-03
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-reg
Note: IFM AP
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Citations: View citations in EconPapers (10)

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Working Paper: Institutional Weakness and Stock Price Volatility (2006)
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