Institutional Weakness and Stock Price Volatility

28 Pages Posted: 15 May 2006 Last revised: 22 Aug 2010

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)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2006

Abstract

We find an empirical regularity that stronger creditor protection reduces the volatility of stock market prices. We analyze two distinct mechanisms that characterize equity price volatility: government guarantees and creditor protection. Using a Tobin q model, we demonstrate that weak creditor protection that gives rise to government guarantees and tightens credit constraints, increases stock price volatility. Empirically, accounting for the probability of financial crises, we find that government guarantees and weak institutions that tighten credit constraints increase aggregated stock price volatility.

Suggested Citation

Hale, Galina and Razin, Assaf and Tong, Hui, Institutional Weakness and Stock Price Volatility (March 2006). NBER Working Paper No. w12127. Available at SSRN: https://ssrn.com/abstract=893782

Galina Hale

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 (Contact Author)

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

Register to save articles to
your library

Register

Paper statistics

Downloads
39
Abstract Views
856
PlumX Metrics