Working Paper: CEPR ID: DP5651
Authors: Galina Hale; Assaf Razin; Hui Tong
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.
Keywords: credit constraints; credit growth; volatility; credit guarantees; stock price volatility
JEL Codes: E30; F30; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| weak creditor protection index (G33) | high stock price volatility (G17) |
| government guarantees (H81) | increased stock price volatility (G17) |
| creditor protection alleviates credit constraints (G21) | stock price volatility (G17) |
| financial crises (G01) | exacerbated stock price volatility (G17) |
| creditor protection (G33) | reduced stock price volatility (G17) |