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): stock price volatility , political uncertainty , worker militancy , great depression

JEL(s): E66 , G12 , G14 , G18 , N12 , N14 , N22 , N24

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP3254.asp

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.