Working Paper: NBER ID: w12127
Authors: Galina Hale; Assaf Razin; Hui Tong
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.
Keywords: No keywords provided
JEL Codes: F3; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stronger creditor protection (G33) | Lower stock market price volatility (G17) |
| Weak creditor protection (G33) | Increased stock market price volatility (G19) |
| Government guarantees (H81) | Increased stock market price volatility (G19) |
| Tighter credit constraints (E51) | Increased stock market price volatility (G19) |
| Creditor protection (G33) | Lower stock market price volatility (G17) |
| Creditor protection (G33) | Increased stock market price volatility (G19) |