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

506 | ICUEH2017Institutional quality, macro liquidity excessive and stock market volatility: Empirical evidences from emerging markets NGUYEN PHUC CANHUniversity of Economics HCMC – canh

506 | ICUEH2017

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 most interestingtopics in financial economics at both micro and macro level Withregard to volatility characteristics, tremendous studies haveconsidered the determinants of stock volatility at both individual andmarket levels (see Harris (1989), Damodaran and Lim (1991), Jaleeland Samarakoon (2009), Vlastakis and Markellos (2012), Sharma,Narayan, and Zheng (2014), and X V Vo (2016) However, in thecontext of deeply financial and economic integration and the

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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 to itsrole 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 on stockmarket volatility as “government policy uncertainty” found in thestudy of Pastor and Veronesi (2012) The study of Vortelinos andSaha (2016) examines the impact of political risk on stock marketvolatility in sixty-six countries and finds that political risks explainthe high volatility and discontinuity in international stock andforeign exchange markets in most of regions excluding Europe.Günay (2016) finds that the Turkish stock market responds topolitical events when analyzing the effects of internal political risk

on stock market in the period of 2001–2014 However, thesestudies only focus on examining the effects of only political risk,while ignoring the other important aspects of institutions such asregulations, law system

In addition, previous studies have investigated effects of moneydynamic on stock market (see Rogalski and Vinso (1977), Fama(1981), Cutler, Poterba, and Summers (1988), Jensen, Mercer, andJohnson (1996), Thorbecke (1997), Abugri (2008), Issahaku,Ustarz, and Domanban (2013), McMillan (2015), Gay (2016)) Themoney growth effect of stock returns and volatility is found to besignificant However, these studies only pay attention to theeffects of changes in money supply without considering itsfluctuations around its theoretical equilibrium

The institution is defined as “the game rules” in a society(Douglass C North, 1990), which includes “humanly devised” whichcontrasts with other economic fundamentals, “the rules of the game”

to set “constraints” on human behavior (see Douglass Cecil North

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(1981), Acemoglu and Robinson (2008)) Hence, improvements ininstitutions reduce asymmetric information problem, transactioncost, and risk, and then increase market efficiency, especiallyefficiency of asset allocation (Cohen, Hawawini, Maier, Schwartz,

& Whitcomb, 1983; T S Ho & Michaely, 1988; Williamson, 1981).Thus, it is argued that better institutional quality would havestronger impact on stock market volatility, especially in emergingmarkets Therefore, this study provides new arguments andempirical evidences for shedding light on the question of whether

or not institutions and excessive in money supply (or macroliquidity excessive) lower stock market volatility in 32 emergingmarkets Besides this, we investigate whether adding theassociation between institutions with macro liquidity excessivecan significantly explain for stock market volatility Usingunbalance annual panel data of 32 emerging markets1 from 2002

to 2013 to investigate impacts of institutions, macro liquidityexcessive, and their associations on stock market volatility whilecontrolling main macroeconomic determinants

Our study is firstly different from the aforementioned studies inmeasuring the macro liquidity excessive, which is presented detail inSection 3 We believe that our method in measuring macro liquidityexcessive is more advantage as a proxy for money supply excessive

at country level Previous studies only investigate impacts of politicalevents such as election and political risk, which only impose riskindirectly on stock market volatility Our study examines the effects

of two important dimensions of institutions, namely regulations andlaw on stock market volatility, to which these institutional indicatorshave directly impacts on the efficiency of stock market through theirimpacts on transaction cost, risk, and the asymmetric informationproblem We also take our analysis one-step further by examiningeffects of the associations between institutions with macro liquidityexcessive on stock market volatility, which contribute to theliterature on the interaction of institution with macroeconomic factor

on stock market volatility, and the policy implication 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

1List 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.

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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 Ourempirical 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 astrong suggestion for stabilizing stock market at emergingeconomies Second, our study contributes empirical evidences tothe scholar that the institutional improvements in associating withhigher excessive of money supply reduce stock market volatility.This result implies that the excessive macro liquidity is less riskyfor stock market if institution is improved At last, our studycontributes enhanced measurement to determine the excessive inmoney supply beside the growth rate of money supply anddecompose money growth rate into underlying and non-underlying parts for examining the effects of money on stockmarket volatility

The rest of the paper is organized as following manner Section 2provides a literature review on determinants of stock marketvolatility and impacts of institutions and macro liquidity excessive.Section 3 briefly describes the methodology in estimating macroliquidity excessive and examining effects of institutions on stockmarket volatility Section 3 also presents our data definitions,calculations, and sources Section 4 presents results and discussesthe findings Section 5 provides a summary and concludes this paper

2 Literature review

There is a huge literature investigating the relationships betweenmacroeconomic factors and stock market volatility The questionabout macroeconomic determinants of stock market volatility wasasked by Schwert (1989), where he investigates the time-varyingstock return volatility by means of the time-varying volatility ofmacroeconomic and financial variables In overall, he points to apositive linkage between macroeconomic volatility such as inflation,money growth, industrial production with stock market volatility (seeWhitelaw (1994), Campbell, Lettau, Malkiel, and Xu (2001), Beltratti

and Morana (2006)) The model of Schwert (1989) is applied andtested in many studies such

of industrial production, the current account deficit and the moneysupply are indirectly associated with Australian stock marketconditional volatility Beltratti and Morana (2006) also find strongevidences of causality running from macroeconomic factors such

as Fed fund rate, inflation, output growth, money growth to USstock market volatility Engle and Rangel (2008), one of thepopular study, propose to model including both macroeconomiceffects and time-series dynamics to investigate the determinants

of stock market volatility for 50 countries in a balanced panel.They find that stock market volatility is a positive function ofoutput growth, inflation, and short-term interest rates In addition,they find that the stock volatility is larger in the lower outputgrowth and high inflation environment, and stock volatility ishigher both for emerging markets and for large economies

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 oilfutures prices are inter-related following a time-varying dynamicprocess and tends to increase when the markets are morevolatile P Wang and Moore (2009) investigates sudden changes

in volatility in the stock markets of new European Union (EU)members and finds that a sudden change in stock volatility seems

to arise from the evolution of emerging stock markets, exchangerate policy changes and financial crises

Meanwhile, the effects of foreign portfolio investment on stockvolatility are got more attentions in recent years due to the higherintegration between markets Jayasuriya (2005) finds thatvolatility may decrease, increase, or remain unchanged followingliberalization at eighteen emerging markets, where countries thatexperienced lower post-liberalization volatility are in generalcharacterized by favorable market characteristics Jaleel andSamarakoon (2009) liberalization of the market to foreigninvestors 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 no impact

on idiosyncratic volatility and a rising impact on total volatility,but capital account openness significantly reduces total volatility,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 markets arestrong 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, and Thailandare found to be positively significant and bi-directional Yarovaya,Brzeszczyński, and Lau (2016) investigate the channels ofvolatility 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.

US and BRICS stock markets and business sectors Alotaibi andMishra (2015) find significant return spillover effects from SaudiArabia and US to Bahrain, Oman, Kuwait, Qatar, United ArabEmirates 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 other determinants

of stock market volatility, where we argue important impacts ofmacro liquidity excessive and institutional quality In fact, the moneysupply is defined as the main macroeconomic determinant of stockmarket volatility Theoretically, the relationship between changes inmoney supply with asset prices is argued by theoretical studiesincluding Brunner (1961), Tobin (1963), Friedman and Schwartz(1975) by following direction: the unexpected changes in the moneygrowth rate 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 the changes inthe money supply as affected by changes in Fed policies will have adirect impact on returns from common stocks in US And in the study

of Schwert (1989), he uses the money growth is one of the mainexplanatory variable in model of explaining the stock volatility andfinds that the money growth volatility predicts stock volatility invarious sub-samples

Meanwhile, the higher money supply leads to improving economicconditions and lower required returns of stocks, hence it is better forstock price stabilization (McMillan, 2015) However, the study ofKeran (1971) argues that the standard theory of stock pricedetermination, discounting to the present the value of expected

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

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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 higher pressure

of inflation, then increases the volatility of stock market volatility,which is documented in both literature and many previous works Forinstance, the study of Thornton (1993) finds the existing feedbackeffects between money supply volatility and stock price volatility in

UK More interesting, Kearney and Daly (1998) find a strongest effect

of the money supply to the conditional volatility of the stock market

in Australia Cai, Chen, Hong, and Jiang (2015) also find that changes

in the M1 money supply besides other factors such as inflation, stockturnover positively and significantly forecast the Chinese stockmarket volatilities, where the increases in money supply (M1) lead to

a high 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 future non-underlying M2 growth as a proxy for macro liquidity They find thatrisk related to innovations in future non-underlying M2 growth isstrongly significantly priced in Korea, after controlling for the well-known risk factors and other macroeconomic variables Overall,they conclude that non-underlying M2 growth more directlyaffects macro liquidity than does aggregate or underlying M2growth Theoretically, money growth affects both on market-wideliquidity, equivalently macro liquidity or macro liquidity, andultimately the level of capital available for investors to tradesecurities, where there is a link between macro liquidity and microliquidity (see Chordia, Sarkar, and Subrahmanyam (2005))

Meanwhile, liquidity is defined as the ability to trade largequantities of a security quickly with a low cost without affecting itsprice, unexpected changes in money growth therefore can causeunfavorable shifts in the investment opportunity set in stockmarket (Jung & Kim, 2016) However, Chordia et al (2005) onlystudy the effect of money flows including bank reserves andmutual fund investments on transactions liquidity without

In this study, we propose an enhanced measurement to developthe method of Jung and Kim (2016) by embodying the money supplyinto non-excessive and excessive, which presents for the excessive

at macro liquidity We argue that the excessive liquidity at nationallevel has significant impacts on stock market volatility beside thenon-underling part of money growth as in work of Jung and Kim(2016) The excessive in money supply is difference from theunexpected changes in money supply since it measures theexcessive of money in comparing to the theoretical equilibrium of theoverall economy, which presents for the excessive in macro liquidity.The macro liquidity excessive, in the one hand, leads to the betterconditions for the economic activities, while it creates flexibilityunder the higher liquidity for investors in managing their investmentportfolio, while the interest rate is lower due to the excessive ofmoney leads to the lower required return, therefore, the stockmarket is more stable However, the excessive in liquidity, in theother hand, leads to the risk-taking behavior of investors, while itcreates inflationary pressures, these combined effects lead to thehigher volatility in stock 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 economic conditionsand the liquidity flexibility of investors in their investment.Meanwhile, the excessive macro liquidity may lead to the higherstock volatility in the long – term due to the inflationary pressure

if the economy cannot absorb this excessive into the realeconomic activities

In addition to the economic determinants, theories and empiricalstudies also define that stock market volatility is determined by theinstitutional factors For instance, the study of Vortelinos and Saha(2016) conclude that political risks explain the high volatility and

discontinuity in international stock markets Similarly, Arouri, Estay,Rault, and

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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 that higherEPU leads to significant increases in market volatility WhileApergis (2015) documents the importance of both policy andtechnological 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., “Arab Spring”) on thevolatility of major stock markets in the MENA region, they findthat by distinguishing between conventional and Islamic stockmarket indices, they document a significant increase in thevolatility of Islamic indices during the period of political unrestswhereas the uprisings have had little or no significant effect onthe volatility in conventional markets Günay (2016) also findsthat the Turkish stock market responds to political events and it isstronger in recent years

Since the higher efficiency of stock market means that the faster

of the information incorporating into stock prices thus the volatility ofstock market is strongly impacted by its efficiency, while the stockmarket efficiency is strongly impacted by the asymmetricinformation problem and transaction cost (Gilson & Kraakman, 2014;Gorton, Huang, & Kang, 2016) As stated, the institution is the rules

of the game in a society (Douglass C North, 1990) including

“humanly devised” which contrasts with other economicfundamentals, “the rules of the game” to set “constraints” on humanbehavior, and the incentives which transmit effects of institution toeconomic activities (see Douglass Cecil North (1981), Acemoglu andRobinson (2008)) The better institution reduces asymmetricinformation problem, transaction cost, and risk, it, in turn, increasesmarket efficiency and the efficiency of asset allocation (Cohen et al.,1983; T S Ho & Michaely, 1988; Williamson, 1981), thereforeinduces a lower stock 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 that trading volumeappears to capture a significant part of volatility asymmetricbehavior in the pre and post 2009 global financial crisis in the Athens

Stock Exchange when they examine the information arrival asmeasured by volume on asymmetric news Byström (2016) finds

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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 institutional aspects

on stock market volatility find interesting results Hayashida and Ono(2016) examine the effect of stock transaction taxes (STT) on stockreturn volatility in Japan and find that the STT abolition in 1999reduced volatility, and that the tax reforms in 2003 reduced volatilitythrough a cut in the dividend tax Bohl, Reher, and Wilfling (2016)find empirical evidence that the financial crisis was accompanied by

an increase in volatility persistence and that this effect wasparticularly pronounced for those stocks that were subject to shortselling constraints in German While, Papadamou, Sidiropoulos, andSpyromitros (2014) addresses the issue of impacts of central banks’transparency on stock market volatility and analytically find anegative link between stock prices volatility and central banktransparency

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 toexamine the effect of stock market liberalization on stock returnvolatility for eighteen emerging markets and find that countriesthat experienced lower post-liberalization volatility are in generalcharacterized by favorable market characteristics such as highermarket transparency and investor protection, and better quality ofinstitutions such as a higher regard for rule of law and lower levels

of corruption Therefore, we argue a significant impact ofassociation between institutions with macro liquidity excessive inthis study Notably, the institutions will form the behaviors ofinvestors and other sectors in the economy when they face to theexcessive liquidity The better institutional quality means thehigher efficiency of market and asset allocations, therefore thefavorable effects of macro liquidity excessive for economicconditions will be exuberated under the better institutional

environment, which means that their associations are morefavorable for the stability of stock market.

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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 of institutions

on economic conditions are documented (Young & Sheehan, 2014),the improvement in institution will have stronger impacts oneconomic factors in some circumstances For instance, P.-H Ho, Lin,and Tsai (2016) find that the improvement in country governancejust enhances the effectiveness of banks and then promote theeconomic growth in developing countries, while it reduces theseeffects in developed countries due to smaller spaces forimprovement Similarly, Yu Wang, Cheng, Wang, and Li (2014) arguethat the improvements in institutional quality just have strong effects

on promoting economic development only when institutional quality

is within a certain range

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 ofLaw, 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 to stockmarket 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 efficiencythrough lower transaction cost and asymmetric informationproblem While, the rule of law captures perceptions of the extent

to which agents have confidence in and abide by the rules ofsociety, and in particular the quality of contract enforcement,property rights, the police, and the courts, as well as thelikelihood of crime and violence (Worlbank, 2015) In fact, thebetter quality of contract enforcement, property rights and otherfactors of rule of law are favorable for lower volatility of stockmarket

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, Yuanyuan

Wang and You (2012) find that the corruption will not be a vitalconstraint on firm growth if financial markets are underdevelopedwhen they examine the effects of institutional

in the aspects of corruption controlling, democratic accountability,and bureaucratic quality are worsening of the income distribution.

In fact, the voice and accountability do not play important role inthe political environment at emerging markets While, thegovernment effectiveness will have affects the efficiency of fiscalpolicies other than the efficiency of stock market At last, thepolitical stability is proxy for the political risk, which is examine inmany previous works thus, we ignore these aspects in this study

3 Methodology and data

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:

!2#$ = !2#$&' + )*++, .#$ + /01#$ + /0234352#$ + 6#$

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 interest rate, and 6 is the residual

term Next, we collect residuals and fitted values of M2 from the equation (1), and then we divide each residual for its fitted value and multiple for 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:

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

at one, which means that the money supply is excessive higher thanthe theoretical equilibrium and its normal deviation in money marketthat 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:

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 institutional quality; the interaction term between Naliqex and Reguqua is

of our results.

In this paper, we collect data of 32 emerging markets from 2002 to

2013 mainly from the World Development Indicators, WorldGovernance Indicator, and Global Financial Development Database ofWorld bank Our range of data from 2002 to 2013 due to theavailable of institutional quality indicators from World GovernanceIndicators, which contains annual continuous series from 2002 In oursample, deposit interest rate is collected from the InternationalFinancial Statistics of IMF, while the excessive of macro liquidity isestimated from our method as presented in above sub-section, thevolatility in exchange rate is calculated from monthly nominalexchange rate of currency of each emerging market with USD, andthe volatility in oil price is calculated by daily WTI oil price Allvariables, definitions, calculations, and sources are presented intable 1