Working Paper: CEPR ID: DP3254
Authors: Hansjoachim Voth
Abstract: 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.
Keywords: Great Depression; Political Uncertainty; Stock Price Volatility; Worker Militancy
JEL Codes: E66; G12; G14; G18; N12; N14; N22; N24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased political demonstrations and strikes (J52) | Higher stock price volatility (G19) |
| Government crises (H12) | Increased stock price volatility (G19) |
| Crackdowns on opposition (purges) (D73) | Reduced stock price volatility (G17) |
| Political risk during the Great Depression (F65) | Stock market volatility (G17) |
| Political instability (O17) | Stock price variability (G19) |
| Inflation volatility (E31) | Stock price variability (G19) |