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Title: Institutional Weakness and Stock Price Volatility

Author(s): Galina B Hale, Assaf Razin and Hui Tong

Publication Date: April 2006

Keyword(s): credit constraints, credit growth volatility, credit guarantees and stock price volatility

Programme Area(s): International Macroeconomics

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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Bibliographic Reference

Hale, G, Razin, A and Tong, H. 2006. 'Institutional Weakness and Stock Price Volatility'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5651