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Stock Market Fragility and the Quality of Governance of the Country

Melissa Chunmei Lin fra National University of Singapore holder innlegg i seminarserien i økonomi og finans ved Handelshøgskolen UiS.

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Tid: Onsdag 7. februar kl 11:30

Sted: Ellen & Axel Lunds hus, møterom H-125

Servering av vafler og kaffe.

Tittel: Stock Market Fragility and the Quality of Governance of the Country

Abstract: We study the relationship between the quality of governance of a country and its degree of financial fragility. We argue that bad governance affects the market by amplifying the reaction of fund manager to public information. This overreaction to public information induces funds' rebalancing swings that create price fragility and excess market volatility for the assets held by the funds. We test this hypothesis using data on international mutual funds and on stocks over the period 2000-2009.

We show that the reaction of the fund managers to public information increases the worse is the governance of the country of the stock they hold. We exploit this information by defining a variable RPIW (Reliance on Public Information induced by Weak governance) and we use it to study the relation between stock value and the quality of governance of the country. We show that bad governance is related to a more positive stock reaction to good news and a more negative stock reaction to bad news. Also, stocks whose mutual fund investors rely more on public information in countries with weak governance display higher total volatility, idiosyncratic volatility, skewness, and lower liquidity. This effect is stronger during the recent crisis.