DP3254 Why was Stock Market Volatility so High During the Great Depression? Evidence from 10 Countries During the Interwar Period

Author(s): Hans-Joachim Voth
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.