Stock markets, volatility, and bank lending: Communication channels and institutional mediation in developed and southern mediterranean economies

Abstract

This study investigates whether stock market dynamics influence credit allocation for capital and project investments, and how this relationship is moderated by institutional quality. Comparing ten developed and Southern Mediterranean economies over the 2008–2023 period, the analysis employs a bootstrap panel Granger causality framework to assess equity returns and GARCH (1,1) conditional volatility channels. The findings reveal that while developed markets display integrated risk-taking dynamics affecting investment credit, Southern Mediterranean markets exhibit defensive banking behaviour where financial volatility sharply constrains project-related CapEx without responding to positive market signals. These heterogeneities underscore that project financing efficacy relies heavily on robust institutional frameworks, such as investor protection and creditor enforcement, challenging the assumption of uniform capital availability across institutionally diverse project environments.