Credit Constraints and Stock Price Volatility

31 Pages Posted: 27 Jun 2007 Last revised: 12 Jul 2007

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: May 2007

Abstract

This paper addresses how creditor protection affects the volatility of stock market prices. Credit protection reduces the probability of oscillations between binding and non-binding states of the credit constraint; thereby lowering the rate of return variance. We test this prediction of a Tobin's q model, by using cross-country panel regression on stock price volatility in 40 countries over the period from 1984 to 2004. Estimated probabilities of a liquidity crisis are used as a proxy for the probability that credit constraints are binding. We find support for the hypothesis that institutions that help reduce the probability of oscillations between binding and non-binding states of the credit constraint also reduce asset price volatility.

Suggested Citation

Hale, Galina and Razin, Assaf and Tong, Hui, Credit Constraints and Stock Price Volatility (May 2007). NBER Working Paper No. w13089. Available at SSRN: https://ssrn.com/abstract=986939

Galina Hale (Contact Author)

Federal Reserve Bank of San Francisco ( email )

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

Assaf Razin

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

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Israel
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+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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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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