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The 1929 Crash of the New York Stock Exchange as a Liquidity Crisis
[Le Krach de 1929 du New York Stock Exchange comme crise de liquidité]

Author

Listed:
  • Jean-Laurent Cadorel

    (EBS Paris - European Business School Paris, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, EHESS - École des hautes études en sciences sociales, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

What caused the 1929 crash of the New York Stock Exchange? This paper provides a quantitative study of liquidity in the 1929 crash of the NYSE. I evidence the crash was indeed a liquidity crisis due to the liquidation of brokers' margin loans. Applying recent estimators of effective spreads and liquidity conditions from contemporary finance literature suggests a fourfold increase in spreads during the crash at the aggregate level. At the individual stock level, quoted bid-ask spreads suggest liquidity explains one-fifth of the variance in daily stock returns in the crash.

Suggested Citation

  • Jean-Laurent Cadorel, 2023. "The 1929 Crash of the New York Stock Exchange as a Liquidity Crisis [Le Krach de 1929 du New York Stock Exchange comme crise de liquidité]," PSE-Ecole d'économie de Paris (Postprint) hal-04347097, HAL.
    • Handle: RePEc:hal:pseptp:hal-04347097
    Note: View the original document on HAL open archive server: https://pse.hal.science/hal-04347097
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