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

  • Voth, Hans-Joachim

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3254.

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Date of creation: Mar 2002
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Handle: RePEc:cpr:ceprdp:3254
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  1. Schwert, G.W., 1988. "Business Cycles, Financial Crises And Stock Volatility," Papers 88-06, Rochester, Business - General.
  2. Grossman, Herschel I, 1999. "Kleptocracy and Revolutions," Oxford Economic Papers, Oxford University Press, vol. 51(2), pages 267-83, April.
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  7. G. William Schwert, 1990. "Stock Returns and Real Activity: A Century of Evidence," NBER Working Papers 3296, National Bureau of Economic Research, Inc.
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  11. Feinstein, Charles H. & Temin, Peter & Toniolo, Gianni, 1997. "The European Economy Between the Wars," OUP Catalogue, Oxford University Press, number 9780198774815, March.
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  14. Daron Acemoglu & James A. Robinson, 2001. "A Theory of Political Transitions," American Economic Review, American Economic Association, vol. 91(4), pages 938-963, September.
  15. Kleidon, Allan W, 1986. "Variance Bounds Tests and Stock Price Valuation Models," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 953-1001, October.
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  18. Officer, R R, 1973. "The Variability of the Market Factor of the New York Stock Exchange," The Journal of Business, University of Chicago Press, vol. 46(3), pages 434-53, July.
  19. Jianping Mei, 1999. "Political Risk, Financial Crisis, and Market Volatility," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-049, New York University, Leonard N. Stern School of Business-.
  20. Hamilton, James D, 1986. "On Testing for Self-fulfilling Speculative Price Bubbles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 545-52, October.
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