Credit Crunch, Creditor Protection, and Asset Prices

Galina Hale, Assaf Razin and Hui Tong

No 162008, Working Papers from Hong Kong Institute for Monetary Research

Abstract: In a Tobin's q model with productivity and liquidity shocks, we study the mechanism through which strong creditor protection increases the level and lowers the volatility of stock market prices. There are two channels at work: (1) the Tobin's q value under a credit crunch regime increases with creditor protection; and, (2) the probability of a credit crunch falls for given stochastic processes of underlying shocks when creditor protection improves. We test these predictions by using cross-country panel regressions of the stock market price level and volatility, in 40 countries, over the period from 1984 to 2004, at annual frequency. We create indicators for liquidity shocks based on quantity and price measures. Estimated probabilities of big shocks to liquidity are used as forecasts of credit crunch. We find broad empirical support for the hypothesis that creditor protection increases the stock market price level and reduces its volatility directly and via its negative effect on the probability of credit crunch. Our empirical findings are robust to multiple specifications.

Pages: 42 pages
Date: 2008-08
New Economics Papers: this item is included in nep-ban, nep-bec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.hkimr.org/uploads/publication/157/ub_full_0_2_185_hkimr-no16_bw.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.hkimr.org/uploads/publication/157/ub_full_0_2_185_hkimr-no16_bw.pdf [301 Moved Permanently]--> http://www.aof.org.hk/research/HKIMR/uploads/publication/157/ub_full_0_2_185_hkimr-no16_bw.pdf [301 Moved Permanently]--> https://www.aof.org.hk/research/HKIMR/uploads/publication/157/ub_full_0_2_185_hkimr-no16_bw.pdf)

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:hkm:wpaper:162008

Access Statistics for this paper

More papers in Working Papers from Hong Kong Institute for Monetary Research Contact information at EDIRC.
Bibliographic data for series maintained by HKIMR ().