Credit constraints and stock price volatility
By: Galina Hale, Assaf Razin, Hui Tong.
Contributors: Razin, Assaf.; Tong, Hui.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13089.; Working paper series (National Bureau of Economic Research) -- working paper no. 13089.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 30
Subjects: Consumer credit; Consumer protection; Stocks -- Prices -- Econometric models
Description: 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.
Notes: "May 2007"

Includes bibliographical references.

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