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Institutional Weakness and Stock Price Volatility

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Author Info
Hale, Galina B
Razin, Assaf
Tong, Hui

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5651.

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Date of creation: Apr 2006
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Handle: RePEc:cpr:ceprdp:5651

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Related research
Keywords: credit constraints; credit growth volatility; credit guarantees; stock price volatility;

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Find related papers by JEL classification:
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
F30 - International Economics - - International Finance - - - General
G20 - Financial Economics - - Financial Institutions and Services - - - General

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. S. Nuri Erbas & Abbas Mirakhor, 2007. "The Equity Premium Puzzle, Ambiguity Aversion, and Institutional Quality," IMF Working Papers 07/230, International Monetary Fund. [Downloadable!]
  2. Hale, Galina B & Razin, Assaf & Tong, Hui, 2008. "Creditor Protection, Contagion, and Stock Market Price Volatility," CEPR Discussion Papers 6658, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Galina Hale & Assaf Razin & Hui Tong, 2007. "Credit Constraints and Stock Price Volatility," NBER Working Papers 13089, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Hale, Galina B & Razin, Assaf & Tong, Hui, 2007. "Creditor Protection and Stock Price Volatility," CEPR Discussion Papers 6540, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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