DP3254 Why was Stock Market Volatility so High During the Great Depression? Evidence from 10 Countries During the Interwar Period
|Publication Date:||March 2002|
|Keyword(s):||great depression, political uncertainty, stock price volatility, worker militancy|
|JEL(s):||E66, G12, G14, G18, N12, N14, N22, N24|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=3254|
The extreme levels of stock price volatility found during the Great Depression have often been attributed to political uncertainty. This Paper performs an explicit test of the Merton/Schwert hypothesis that doubts about the survival of the capitalist system were partly responsible. It does so by using a panel data set on political unrest, demonstrations and other indicators of instability in a set of 10 developed countries during the interwar period. Fear of worker militancy and a possible revolution can explain a substantial part of the increase in stock market volatility during the Great Depression.