Investors’ Protection, Corruption and Legal Origin on the Equity Market Volatility: A Global Perspective

Abstract

This study explores the relationship between the roles played by institutional factors such as investors' protection, corruption and legal origin on the global equity market volatility using a panel data over a period of 5 years; 2008 -2012. Ninety-one countries were selected based on data availability from the World Bank. Generalized moving methods (GMM) is employed to identify the short and long-run effects of the abovementioned relationship. The results indicate that investors' protection and legal origin play a significant role in the equity market volatility for all countries. It is conjectured that proper investors' protection and legal execution are important for a country to have a stable equity market because this mitigates uncertainty and increases investor confidence. Further analysis on sub-groups (Emerging Markets and Developed Markets) indicate that all three variables analysed in this study, i.e., investors protection, transparency levels and legal origin have an impact on the volatility of a stock market. High transparency level coupled with low corruption level creates more confidence amongst investors in the developed countries as opposed to the emerging markets and this reduces the volatility. Taken together, the results clearly signal to the market that investors are cautious on the extent of protection given by a country, its transparency levels and the legal content and enforcement.