Institutional Weakness and Stock Price Volatility

Assaf Razin, Galina Hale and Hui Tong

No 5651, CEPR Discussion Papers from Centre for Economic Policy Research

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 (search for similar items in EconPapers)
JEL-codes: E30 F30 G20 (search for similar items in EconPapers)
Date: 2006-04
New Economics Papers: this item is included in nep-fin and nep-mac
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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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