Institutional quality, macro liquidity excessive and stock market volatility empirical evidences from emerging markets

Institutional quality, macro liquidity excessive and stock market volatility: Empirical evidences from emergingmarkets NGUYEN PHUC CANHUniversity of Economics HCMC – canhnguyen@ueh.edu.v

Institutional quality, macro liquidity excessive and stock market volatility: Empirical evidences from emerging

markets

NGUYEN PHUC CANHUniversity of Economics HCMC – canhnguyen@ueh.edu.vn

SU DINH THANHUniversity of Economics HCMC – dinhthanh@ueh.edu.vn

Abstract

The relationship between monetary policy and stock market is still argument in the literature, especially in emerging countries The study investigates the relationship between institutional quality, macro liquidity excessive and stock market volatility, in which macro liquidity excessive is used as a proxy for monetary policy Using a panel data of

32 emerging markets in the period of 2002 – 2013 and employing Sys GMM estimation, the study finds that the relationship between macro liquidity excessive and stock volatility is significantly negative Interestingly, when interacting with institutional quality variables, namely regulatory quality and law indicator, the effects of institutions on stock returns are significantly negative That means that institution quality moderates the effect of macro liquidity excessive on stock market volatility, implying that emerging countries should attend to improving institutional quality to reduce stock market volatility.

Keywords: institution; liquidity excessive; stock market; volatility.

1 Introduction

Stock market volatility is undoubtedly one of the mostinteresting topics in financial economics at both micro andmacro level With regard to volatility characteristics,tremendous studies have considered the determinants of stockvolatility at both individual and market levels (see Harris (1989),Damodaran and Lim (1991), Jaleel and Samarakoon (2009),Vlastakis and Markellos (2012), Sharma, Narayan, and Zheng(2014), and X V Vo (2016) However, in the context of deeplyfinancial and economic integration and the

Nguyen Phuc Canh & Su Dinh Thanh| 1

recent 2008 global financial crisis, much attention has beenwithdrawn the stock volatility at market level (for instance, seeAbbas, Khan, and Shah (2013), Zare, Azali, and Habibullah(2013), Bouri (2015a), Syriopoulos, Makram, and Boubaker(2015), Assaf (2016)).

It is important to understand stock market volatility due toits role in portfolio management and predictability model ofindividual stock returns and volatility, and economic volatility(Mittnik, Robinzonov, & Spindler, 2015; Sharma et al., 2014;Syriopoulos et al., 2015) Many previous studies have focused onmain determinants of stock market volatility such as oil price,exchange rate, interest rate, inflation, economic cycles, marketliquidity, financial liberalization, etc., (see Pierdzioch, Döpke, andHartmann (2008), Bley and Saad (2011), Walid, Chaker, Masood,and Fry (2011), Girardin and Joyeux (2013), Bouri (2015b),Choudhry, Papadimitriou, and Shabi (2016), Kawakami (2016)).Some studies have investigated the effects of institutions onstock market volatility as “government policy uncertainty” found

in the study of Pastor and Veronesi (2012) The study ofVortelinos and Saha (2016) examines the impact of political risk

on stock market volatility in sixty-six countries and finds thatpolitical risks explain the high volatility and discontinuity ininternational stock and foreign exchange markets in most ofregions excluding Europe Günay (2016) finds that the Turkishstock market responds to political events when analyzing theeffects of internal political risk on stock market in the period of2001–2014 However, these studies only focus on examining theeffects of only political risk, while ignoring the other importantaspects of institutions such as regulations, law system

In addition, previous studies have investigated effects ofmoney dynamic on stock market (see Rogalski and Vinso(1977), Fama (1981), Cutler, Poterba, and Summers (1988),Jensen, Mercer, and Johnson (1996), Thorbecke (1997), Abugri(2008), Issahaku, Ustarz, and Domanban (2013), McMillan (2015),Gay (2016)) The money growth effect of stock returns andvolatility is found to be significant However, these studies onlypay attention to the effects of changes in money supply withoutconsidering its fluctuations around its theoretical equilibrium.The institution is defined as “the game rules” in a society(Douglass C North, 1990), which includes “humanly devised”which contrasts with other economic fundamentals, “the rules ofthe game” to set “constraints” on human behavior (see DouglassCecil North

(1981), Acemoglu and Robinson (2008)) Hence, improvements

in institutions reduce asymmetric information problem,transaction cost, and risk, and then increase market efficiency,especially efficiency of asset allocation (Cohen, Hawawini, Maier,Schwartz, & Whitcomb, 1983; T S Ho & Michaely, 1988;Williamson, 1981) Thus, it is argued that better institutionalquality would have stronger impact on stock market volatility,especially in emerging markets Therefore, this study providesnew arguments and empirical evidences for shedding light on thequestion of whether or not institutions and excessive in moneysupply (or macro liquidity excessive) lower stock market volatility

in 32 emerging markets Besides this, we investigate whetheradding the association between institutions with macro liquidityexcessive can significantly explain for stock market volatility.Using unbalance annual panel data of 32 emerging markets1 from

2002 to 2013 to investigate impacts of institutions, macroliquidity excessive, and their associations on stock marketvolatility while controlling main macroeconomic determinants.Our study is firstly different from the aforementioned studies inmeasuring the macro liquidity excessive, which is presented detail

in Section 3 We believe that our method in measuring macroliquidity excessive is more advantage as a proxy for moneysupply excessive at country level Previous studies onlyinvestigate impacts of political events such as election andpolitical risk, which only impose risk indirectly on stock marketvolatility Our study examines the effects of two importantdimensions of institutions, namely regulations and law on stockmarket volatility, to which these institutional indicators havedirectly impacts on the efficiency of stock market through theirimpacts on transaction cost, risk, and the asymmetricinformation problem We also take our analysis one-step further

by examining effects of the associations between institutionswith macro liquidity excessive on stock market volatility, whichcontribute to the literature on the interaction of institution withmacroeconomic factor on stock market volatility, and the policyimplication for authorizers in stabilizing financial market

With this strategy, we believe that our study has significantcontribution to both scholar and practice First, our studycontributes to the detrimental literature of stock

1

List of emerging markets: Argentina, Brazil, Bulgaria, Chile, China (mainland), Colombia, Czech Republic, Egypt Arab Rep., Estonia, Greece, Hungary, India, Indonesia, Korea Rep., Latvia, Lithuania, Malaysia, Mexico, Morocco, Nigeria, Oman, Pakistan, Peru, Philippines, Poland, Romania, Russian Federation, Slovenia, South Africa, Thailand, Turkey, and Vietnam.

market volatility by adding new factors including the macroliquidity excessive and institutional quality To the best of ourknowledge, this paper is the first work on the impacts of macroliquidity excessive and institutions on stock market volatility.Our empirical results show consistent evidences that the macroliquidity excessive has strong significant negative impacts onstock market volatility in emerging markets, which confirms theliterature that the excessive in money supply moves into stockmarket and makes it more stable In addition, our empirical resultsalso show that the better institutional quality including quality ofregulations and law reduce stock market volatility, which implies

a strong suggestion for stabilizing stock market at emergingeconomies Second, our study contributes empirical evidences tothe scholar that the institutional improvements in associatingwith higher excessive of money supply reduce stock marketvolatility This result implies that the excessive macro liquidity isless risky for stock market if institution is improved At last, ourstudy contributes enhanced measurement to determine theexcessive in money supply beside the growth rate of moneysupply and decompose money growth rate into underlying andnon-underlying parts for examining the effects of money on stockmarket volatility

The rest of the paper is organized as following manner Section

2 provides a literature review on determinants of stock marketvolatility and impacts of institutions and macro liquidityexcessive Section 3 briefly describes the methodology inestimating macro liquidity excessive and examining effects ofinstitutions on stock market volatility Section 3 also presents ourdata definitions, calculations, and sources Section 4 presentsresults and discusses the findings Section 5 provides a summaryand concludes this paper

2 Literature review

There is a huge literature investigating the relationshipsbetween macroeconomic factors and stock market volatility Thequestion about macroeconomic determinants of stock marketvolatility was asked by Schwert (1989), where he investigatesthe time- varying stock return volatility by means of the time-varying volatility of macroeconomic and financial variables Inoverall, he points to a positive linkage between macroeconomicvolatility such as inflation, money growth, industrial productionwith stock market volatility (see Whitelaw (1994), Campbell,Lettau, Malkiel, and Xu (2001), Beltratti and Morana (2006)) The

model of Schwert (1989) is applied and tested in many studiessuch

as Pierdzioch et al (2008) use to forecast the volatility of

Germany stock market, while Beltratti and Morana (2006) test it

in US stock market

Many previous studies have examined other macroeconomicfactors including internal and external factors such oil price,exchange rate, interest rate, economic growth, foreign portfolioinvestment flow, stock market liberalization, US stock market indetermining stock market volatility For instance, Kearney andDaly (1998) find that among the most important determinants,such as the inflation and interest rates, the conditionalvolatilities of industrial production, the current account deficit andthe money supply are indirectly associated with Australian stockmarket conditional volatility Beltratti and Morana (2006) alsofind strong evidences of causality running from macroeconomicfactors such as Fed fund rate, inflation, output growth, moneygrowth to US stock market volatility Engle and Rangel (2008), one

of the popular study, propose to model including bothmacroeconomic effects and time-series dynamics to investigatethe determinants of stock market volatility for 50 countries in abalanced panel They find that stock market volatility is a positivefunction of output growth, inflation, and short-term interest rates

In addition, they find that the stock volatility is larger in thelower output growth and high inflation environment, and stockvolatility is higher both for emerging markets and for largeeconomies

Along different direction, Diebold and Yilmaz (2008) examinethe links between asset return volatility and the volatility of itsunderlying macroeconomic determinants for forty countries andfind a positive relationship between stock return and GDP (orconsumption) growth volatilities Similarly, Engle, Ghysels, andSohn (2008) find that the long-term component of stock returnvolatility is driven by inflation and industrial production growth.Girardin and Joyeux (2013) find that the influence ofmacroeconomic variables on the long-run volatility of the Chinesestock market is limited to the nominal variables, with anoteworthy disconnect form the real economy However, theyconclude that macroeconomic fundamentals play an increasingrole after China joined WTO, especially for CPI inflation

Beside inflation, economic growth, interest rate, the exchangerate fluctuations also play important role in explaining stockmarket volatility Walid et al (2011) find strong evidence that therelationship between stock and foreign exchange markets isregime dependent and stock-price volatility respondsasymmetrically to events in the foreign

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exchange market While, Creti, Joëts, and Mignon (2013) findstrong correlations between commodity such as oil, coffee, cocoa,gold and stock markets evolve through time and are highlyvolatile, particularly since the 2007–2008 financial crisis In thesame argument,

M Vo (2011) finds that the stock volatility and oil futures pricesare inter-related following a time-varying dynamic process andtends to increase when the markets are more volatile P Wangand Moore (2009) investigates sudden changes in volatility in thestock markets of new European Union (EU) members and findsthat a sudden change in stock volatility seems to arise from theevolution of emerging stock markets, exchange rate policychanges and financial crises

Meanwhile, the effects of foreign portfolio investment on stockvolatility are got more attentions in recent years due to thehigher integration between markets Jayasuriya (2005) findsthat volatility may decrease, increase, or remain unchangedfollowing liberalization at eighteen emerging markets, wherecountries that experienced lower post-liberalization volatility are

in general characterized by favorable market characteristics.Jaleel and Samarakoon (2009) liberalization of the market toforeign investors significantly increased the return volatility in theColombo Stock Exchange Ben Rejeb and Boughrara (2015) findthat financial liberalization contributes significantly in amplifyingthe international transmission of volatility and the risk ofcontagion in emerging markets In contrast, Bley and Saad (2011)point that international participation in local trades has noimpact on idiosyncratic volatility and a rising impact on totalvolatility, but capital account openness significantly reduces totalvolatility, especially for stocks with low foreign ownership limits

In the trend of financial and economic integrations, the spillover

or contagion from a large stock market to other stock marketsare strong noticed Mukherjee and Mishra (2010) study the stockmarket integration and volatility spillover between India and itsmajor Asian counterparties They find that contemporaneousintraday return spillovers between India and its Asiancounterparts including Hong Kong, Korea, Singapore, andThailand are found to be positively significant and bi-directional.Yarovaya, Brzeszczyński, and Lau (2016) investigate the channels

of volatility transmission across stock index futures in six majordeveloped and emerging markets in Asia, they find stronglinkages between markets within the Asian region, indicating thatthe signal receiving markets are sensitive to both negative and

positive volatility shocks, which reveals the asymmetric nature ofvolatility transmission channels.

However, in the context of emerging markets, there is clearlyconclusion that US stock market has strong impacts For instance,

Y A Liu and Pan (1997) investigates the mean return andvolatility spillover effects from the U.S and Japan to four Asianstock markets, including Hong Kong, Singapore, Taiwan, andThailand, their results suggest that the U.S market is moreinfluential than the Japanese market in transmitting returns andvolatilities to the four Asian markets Syriopoulos et al (2015) findsignificant return and volatility transmission dynamics areidentified between the US and BRICS stock markets and businesssectors Alotaibi and Mishra (2015) find significant return spillovereffects from Saudi Arabia and US to Bahrain, Oman, Kuwait,Qatar, United Arab Emirates markets

However, the study of Schwert (1989) finds that the level ofmacroeconomic volatility explains less than half of the volatility ofstock returns Therefore, there definitely consists otherdeterminants of stock market volatility, where we argueimportant impacts of macro liquidity excessive and institutionalquality In fact, the money supply is defined as the mainmacroeconomic determinant of stock market volatility.Theoretically, the relationship between changes in money supplywith asset prices is argued by theoretical studies includingBrunner (1961), Tobin (1963), Friedman and Schwartz (1975) byfollowing direction: the unexpected changes in the money growthrate results in a change in the equilibrium position of moneywith respect of other asset in the portfolio of investors, henceinvestors try to adjust the proportion of their asset portfoliorepresented by money balances, while the system cannot adjustsince all money balance must be held; hence, equilibrium isreestablished by changes in the price levels of the various assetcategories including the stock prices (Rogalski & Vinso, 1977).Then, the study of Rogalski and Vinso (1977) conclude that thechanges in the money supply as affected by changes in Fedpolicies will have a direct impact on returns from common stocks

in US And in the study of Schwert (1989), he uses the moneygrowth is one of the main explanatory variable in model ofexplaining the stock volatility and finds that the money growthvolatility predicts stock volatility in various sub-samples

Meanwhile, the higher money supply leads to improvingeconomic conditions and lower required returns of stocks, hence

it is better for stock price stabilization (McMillan, 2015) However,the study of Keran (1971) argues that the standard theory of stockprice determination, discounting to the present the value of

expected future earnings, which involves the use of a nominalinterest rate which includes real interest rate and expected

inflation to determine the present value of expected corporateearnings over some future time horizon Therefore, in the contrastpoint of view, the higher money supply also leads to higherpressure of inflation, then increases the volatility of stock marketvolatility, which is documented in both literature and manyprevious works For instance, the study of Thornton (1993) findsthe existing feedback effects between money supply volatilityand stock price volatility in UK More interesting, Kearney andDaly (1998) find a strongest effect of the money supply to theconditional volatility of the stock market in Australia Cai, Chen,Hong, and Jiang (2015) also find that changes in the M1 moneysupply besides other factors such as inflation, stock turnoverpositively and significantly forecast the Chinese stock marketvolatilities, where the increases in money supply (M1) lead to ahigh future stock market volatility and hence high market risk.Despites, many previous studies define that money supplygrowth is an important determinant of stock volatility, Liljeblomand Stenius (1997) can’t find significant evidence on the effects ofmoney supply M2 in Finnish stock market, while they revealsignificant impacts of inflation, industrial production, and changes

in term of trade Similarly, Choi and Yoon (2015) find that themoney supply of both Korea and US had no effect on the Koreanstock market volatility Therefore, Jung and Kim (2016) proposenew way of examine the effects of money supply on stock marketvolatility by decomposing the broad money M2 into an underlyingand a non-underlying part and propose innovations in futurenon-underlying M2 growth as a proxy for macro liquidity Theyfind that risk related to innovations in future non-underlying M2growth is strongly significantly priced in Korea, after controllingfor the well-known risk factors and other macroeconomicvariables Overall, they conclude that non-underlying M2 growthmore directly affects macro liquidity than does aggregate orunderlying M2 growth Theoretically, money growth affects both

on market-wide liquidity, equivalently macro liquidity or macroliquidity, and ultimately the level of capital available forinvestors to trade securities, where there is a link betweenmacro liquidity and micro liquidity (see Chordia, Sarkar, andSubrahmanyam (2005))

Meanwhile, liquidity is defined as the ability to trade largequantities of a security quickly with a low cost without affectingits price, unexpected changes in money growth therefore cancause unfavorable shifts in the investment opportunity set in stockmarket (Jung & Kim, 2016) However, Chordia et al (2005) only

study the effect of money flows including bank reserves andmutual fund investments on transactions liquidity without

considering the underling and non-underling part of moneygrowth, which may miss in measuring the shocks of moneysupply on stock market volatility In fact, the study of Jung andKim (2016) has contributed to the literature by decomposingmoney growth into an underlying and a non-underlying part,which means the expected and un-expected changes in moneysupply, this method is more advantage in measuring the effects

of money growth on stock market volatility since the unexpectedchanges in money growth as a state variable that is an embody

of risk factor, therefore impacting on investor’s behaviors andoverall stock market volatility

In this study, we propose an enhanced measurement todevelop the method of Jung and Kim (2016) by embodying themoney supply into non-excessive and excessive, which presentsfor the excessive at macro liquidity We argue that the excessiveliquidity at national level has significant impacts on stock marketvolatility beside the non-underling part of money growth as inwork of Jung and Kim (2016) The excessive in money supply isdifference from the unexpected changes in money supplysince it measures the excessive of money in comparing to thetheoretical equilibrium of the overall economy, which presents forthe excessive in macro liquidity The macro liquidity excessive, inthe one hand, leads to the better conditions for the economicactivities, while it creates flexibility under the higher liquidity forinvestors in managing their investment portfolio, while theinterest rate is lower due to the excessive of money leads to thelower required return, therefore, the stock market is more stable.However, the excessive in liquidity, in the other hand, leads to therisk-taking behavior of investors, while it creates inflationarypressures, these combined effects lead to the higher volatility instock market

In short-term viewpoint, we argue that the macro liquidityexcessive will favor the stock market by reducing the volatilitydue to the short-term positive effects on the economicconditions and the liquidity flexibility of investors in theirinvestment Meanwhile, the excessive macro liquidity may lead

to the higher stock volatility in the long – term due to theinflationary pressure if the economy cannot absorb this excessiveinto the real economic activities

In addition to the economic determinants, theories andempirical studies also define that stock market volatility isdetermined by the institutional factors For instance, the study ofVortelinos and Saha (2016) conclude that political risks explain the

high volatility and discontinuity in international stock markets.Similarly, Arouri, Estay, Rault, and

Roubaud (2016) find that the increase in policy uncertaintyreduces significantly stock returns and that this effect is strongerand persistent during extreme volatility periods L Liu and Zhang(2015) investigates the predictability of economic policyuncertainty (EPU) to stock market volatility, they find thathigher EPU leads to significant increases in market volatility.While Apergis (2015) documents the importance of both policyand technological risks, especially after the recent financial crisisevent when he examines the role of both policy risk including therisk related to tax, spending, and monetary policies, andtechnological risk on U.S stock returns Chau, Deesomsak, andWang (2014) examines the impact of political uncertainty(caused by the civil uprisings in the Arab World i.e., “ArabSpring”) on the volatility of major stock markets in the MENAregion, they find that by distinguishing between conventional andIslamic stock market indices, they document a significant increase

in the volatility of Islamic indices during the period of politicalunrests whereas the uprisings have had little or no significanteffect on the volatility in conventional markets Günay (2016) alsofinds that the Turkish stock market responds to political eventsand it is stronger in recent years

Since the higher efficiency of stock market means that thefaster of the information incorporating into stock prices thus thevolatility of stock market is strongly impacted by its efficiency,while the stock market efficiency is strongly impacted by theasymmetric information problem and transaction cost (Gilson &Kraakman, 2014; Gorton, Huang, & Kang, 2016) As stated, theinstitution is the rules of the game in a society (Douglass CNorth, 1990) including “humanly devised” which contrasts withother economic fundamentals, “the rules of the game” to set

“constraints” on human behavior, and the incentives whichtransmit effects of institution to economic activities (see DouglassCecil North (1981), Acemoglu and Robinson (2008)) The betterinstitution reduces asymmetric information problem, transactioncost, and risk, it, in turn, increases market efficiency and theefficiency of asset allocation (Cohen et al., 1983; T S Ho &Michaely, 1988; Williamson, 1981), therefore induces a lowerstock volatility

There are studies have noticed the impacts of the stock marketefficiency on volatility through the effects asymmetric informationproblem and support for these arguments For instance,Koulakiotis, Babalos, and Papasyriopoulos (2015) reveal thattrading volume appears to capture a significant part of volatilityasymmetric behavior in the pre and post 2009 global financial

crisis in the Athens Stock Exchange when they examine theinformation arrival as measured by volume on asymmetric news.Byström (2016) finds

that the stock market volatility and the number of publiclyavailable global news stories are strongly linked, the directionallink between news and volatility, furthermore, rather is from news

to volatility than vice versa Shi, Ho, and Liu (2016) indicate thatfirm- specific news sentiment is more significant in quantifyingintraday volatility persistence in the low volatility state than thehigh state Lansing and LeRoy (2014) show that the volatility ofthe price–dividend ratio increases monotonically with investorinformation but the relationship between investor information andequity return volatility can be non- monotonic, depending on riskaversion and other parameter values

Previous studies about the impacts of other institutionalaspects on stock market volatility find interesting results.Hayashida and Ono (2016) examine the effect of stocktransaction taxes (STT) on stock return volatility in Japan and findthat the STT abolition in 1999 reduced volatility, and that the taxreforms in 2003 reduced volatility through a cut in the dividendtax Bohl, Reher, and Wilfling (2016) find empirical evidence thatthe financial crisis was accompanied by an increase in volatilitypersistence and that this effect was particularly pronounced forthose stocks that were subject to short selling constraints inGerman While, Papadamou, Sidiropoulos, and Spyromitros (2014)addresses the issue of impacts of central banks’ transparency onstock market volatility and analytically find a negative linkbetween stock prices volatility and central bank transparency

In addition, the institution also has effects on stock marketvolatility through the association with other determinants Forinstance, the study of Jayasuriya (2005) link post-liberalizationvolatility with market characteristics and quality of institutions

to examine the effect of stock market liberalization on stockreturn volatility for eighteen emerging markets and find thatcountries that experienced lower post-liberalization volatility are

in general characterized by favorable market characteristics such

as higher market transparency and investor protection, and betterquality of institutions such as a higher regard for rule of law andlower levels of corruption Therefore, we argue a significantimpact of association between institutions with macro liquidityexcessive in this study Notably, the institutions will form thebehaviors of investors and other sectors in the economy whenthey face to the excessive liquidity The better institutional qualitymeans the higher efficiency of market and asset allocations,therefore the favorable effects of macro liquidity excessive foreconomic conditions will be exuberated under the better

institutional environment, which means that their associations aremore favorable for the stability of stock market.

In the context of emerging markets, who are on the ways ofimproving their institution and developing financial markets, theeffects of macro liquidity excessive and institutional quality areargued in a stronger stance Since the positive effects ofinstitutions on economic conditions are documented (Young &Sheehan, 2014), the improvement in institution will havestronger impacts on economic factors in some circumstances Forinstance, P.-H Ho, Lin, and Tsai (2016) find that the improvement

in country governance just enhances the effectiveness of banksand then promote the economic growth in developing countries,while it reduces these effects in developed countries due tosmaller spaces for improvement Similarly, Yu Wang, Cheng,Wang, and Li (2014) argue that the improvements in institutionalquality just have strong effects on promoting economicdevelopment only when institutional quality is within a certainrange

The works of Kaufmann, Kraay, and Zoido-Lobatón (1999),Kaufmann, Kraay, and Zoido (1999), and later studies undersupporting from World bank have classified institutions into sixaspects: Voice and Accountability, Political Stability and Absence

of Violence, Government Effectiveness, Regulatory Quality, Rule

of Law, and Control of Corruption In which, we argue that thechanges in Regulatory quality and Rule of Law will have strongerimpacts on stock market volatility due to its thin relations tostock market activities Indeed, the regulatory quality capturesperceptions of the ability of the government to formulate andimplement sound policies and regulations that permit andpromote private sector development which including the financialmarkets (Worlbank, 2015) Thus, the better regulatory qualityenhances both of the development of financial markets and theeconomic conditions, which then induces higher efficiency throughlower transaction cost and asymmetric information problem.While, the rule of law captures perceptions of the extent to whichagents have confidence in and abide by the rules of society, and

in particular the quality of contract enforcement, property rights,the police, and the courts, as well as the likelihood of crime andviolence (Worlbank, 2015) In fact, the better quality of contractenforcement, property rights and other factors of rule of law arefavorable for lower volatility of stock market

Meanwhile, other aspects of institution including Voice andAccountability, Political Stability and Absence of Violence,Government Effectiveness, and Control of Corruption are arguedwith less impact on stock market volatility For example, YuanyuanWang and You (2012) find that the corruption will not be a vital

constraint on firm growth if financial markets areunderdeveloped when they examine the effects of institutional

quality on the aspect of the corruption controlling in China.While, the study of Aidt, Dutta, and Sena (2008) find thatcorruption has a substantial negative impact on economicgrowth in high institutional quality economies, otherwise it has noimpact on economic growth in low quality one Similarly, the study

of Perera and Lee (2013) in India finds that the improvements ininstitutional quality in the aspects of government stability and lawand order reduce poverty, however the better institutional quality

in the aspects of corruption controlling, democraticaccountability, and bureaucratic quality are worsening of theincome distribution In fact, the voice and accountability do notplay important role in the political environment at emergingmarkets While, the government effectiveness will have affectsthe efficiency of fiscal policies other than the efficiency of stockmarket At last, the political stability is proxy for the political risk,which is examine in many previous works thus, we ignore theseaspects in this study

3 Methodology and data

3.1 Methodology

In this section, we present our methodology and data toexamine impacts of macro liquidity excessive, institution, andtheir associations on the stock market volatility in 32 emergingmarkets in the period of 2002 - 2013 In the first step, weestimate the theoretical equilibrium in money market with threemain explanatory variables including the level of logarithm of realGDP per capita as a proxy for national income level, GDP deflator

as a proxy for inflation under the literature of the quantity theory

of money, and deposit interest rate as a proxy for interest rateunder the literature of the Keynesian economics:

(1)

in which: i and t denote country i and year t; M2 is the ratio of

broad money (M2) to GDP,

which is the proxy of money equilibrium in the money market,

Loggdppc is the logarithm

of GDP per capita, Inf is the GDP deflator, Interest is the deposit

residuals and fitted values of M2 from the equation (1),

and then we divide each residual for its fitted value and multiplefor 100 to scale up as the percentage of money supply differs

from its theoretical equilibrium, which is denoted as Naliqvo.

Then, we calculate the standard deviation of Naliqvo and define

dummy variable, which is the proxy for macro liquidity excessive

(Naliqex), as following formula:

789:;3< =1 :1 789:;@* > [C380 789:;@* + 1.5 ∗ 52,

789:;@* ]

Following the calculation in equation (2), if Naliqex receives

value at one, which means

that the money supply is excessive higher than the theoretical equilibrium and its normal deviation in money market that is best proxy for the macro liquidity excessive

In the second step, following previous works in examiningdeterminants of stock market volatility, such as Beltratti andMorana (2006), Jiang, Rapach, Strauss, Tu, and Zhou (2011),Girardin and Joyeux (2013), Mittnik et al (2015), Chen, Jiang, Li,and Xu (2016), we apply the model with control variables,including stock market turnover, stock market capitalization, realGDP growth rate, GDP deflator, deposit interest rate, the growthrate of M2, the net flow of foreign portfolio investment to GDP,volatility in changes of nominal exchange rate, price volatility in

US stock market, and the volatility in the changes of WTI oil price

to examine impacts of regulatory quality, macro liquidityexcessive, and their associations on stock market volatility:

J2*.K@*#$ = J2*.K@*#$&' + LM40*@34#$ + J2*.K.8-#$ + N,-+#$ + /01#$ +

/0234352#$ + !2+#$ + O-:#$ + O<@*#$ + P5@*#$ + Q:9@*#$ +

789:;3<#$ + R3+M;M8#$ + 789:;3<#$ ∗ R3+M;M8#$ + S#$

(3)in which: Stockvo is stock price volatility in each emerging market, which is the proxy of stock market volatility; Turnover is

the stock market turnover calculated by the ratio of trade value

to market capitalization, which is the proxy of market liquidity;

Stockcap is stock market capitalization calculated by market value

of stock market to GDP, which is the proxy of stock market size;

Gdpg is the real GDP growth rate, which is the proxy of real economic growth; Inf and Interest are same as in equation (1); M2g is the growth rate of M2, which is the proxy of money growth rate; Fpi is the ratio of foreign portfolio investment net inflow to GDP, which is the proxy of portfolio investment flow; Fxvo is the

volatility of percentage changes in nominal exchange rate, which

is the proxy of the risk in foreign exchange market; Usvo is price

volatility in US stock market, which is the proxy for the effects of

US stock market to emerging markets; Oilvo is the volatility in the

changes of WTI oil price, which is the proxy for the changes in

commodity market; Reguqua is the percentage changes in

Regulatory quality indicator, which is the proxy for changes in