Creditor Protection and Stock Price Volatility

Assaf Razin, Galina Hale and Hui Tong

No 6540, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyzes the effect of creditor protection on the volatility of stock market returns. Our application of the Tobin?s q model predicts that credit protection reduces the probability of oscillations between binding and nonbinding states of the credit constraint, which result from liquidity crises and their aftermath. In this way creditor protection regulation reduces the stock market price volatility. We test this prediction by using cross-country panel regressions of the stock return volatility, in 40 countries, over the period from 1984 to 2004. Estimated probabilities of big shocks to liquidity are used as a forecast of a switch from a credit?unconstrained to a credit-constrained regime. We find support for the hypothesis that creditor protection institutions reduce the probability of oscillations between binding and nonbinding states of the credit constraint and thereby help reduce the asset price volatility.

Keywords: Collateral; Credit constrained regimes; Probability of liquidity crisis (search for similar items in EconPapers)
JEL-codes: E44 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-fmk and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP6540 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:6540

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP6540

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().