Creditor Protection, Contagion, and Stock Market Price Volatility

39 Pages Posted: 5 Jun 2008

See all articles by Galina Hale

Galina Hale

Federal Reserve Bank of San Francisco

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Hui Tong

International Monetary Fund (IMF)

Date Written: January 2008

Abstract

We study a mechanism through which strong creditor protection affect positively the level, and negatively the volatility, of the aggregate stock market price. In a Tobin-q model with liquidity and productivity shocks, two channels are at work: (1) Creditor protection raises the stock value in a credit-constraint regime; (2) Creditor protection lowers the probability of the credit crunch. We confront the key predictions of the model to a panel of 40 countries over the period from 1984 to 2004. We find support to the hypothesis that creditor protection have a positive effect on the level, and a negative effect of the volatility, of stock prices, via the negative effect of the creditor protection on the probability of credit crunch.

Keywords: Credit crunch, Probit estimation, Tobin-q

JEL Classification: E1, G2

Suggested Citation

Hale, Galina and Razin, Assaf and Tong, Hui, Creditor Protection, Contagion, and Stock Market Price Volatility (January 2008). , Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1140587

Galina Hale (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3131 (Phone)
415-974-2168 (Fax)

HOME PAGE: http://www.frbsf.org/economic-research/economists/galina-hale/

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 7303 (Phone)
+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Hui Tong

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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