Does Downside Risk in the Stock Market Differ by Legal Origin? The Impact of Property Rights and the Rule of Law on Stock Markets

Downside risk in stock prices is a significant focus in stock investment. This study investigates how the legal origin of each country affects its property rights and the rule of law, and how these property rights and the rule of law affect the downside risk of the stock market differently. Value-at-risk (VaR), estimated by the rate of return on a stock market index, is used as the downside risk of the stock market. We estimate the data from 57 countries, showing that the intensity of property rights and the rule of law vary by legal origin. We also find that the impact of property rights and the rule of law on downside risk of the stock market varies by legal origin. In particular, strengthening property rights and the rule of law in countries with French legal origins lowers downside risks. However, the marginal effects of property rights and the rule of law on downside risk are positive for German legal origin. Thus, because of the observed varieties of capitalism, we should consider the legal environment and implement policies compatible with the legal origin