Working Paper: NBER ID: w23554
Authors: Gustavo S. Cortes; Marc D. Weidenmier
Abstract: Stock return volatility during the Great Depression has been labeled a “volatility puzzle” because the standard deviation of stock returns was two to three times higher than any other period in American history (Officer, 1973; Wilson, Sylla, and Jones; 1990). We investigate the “volatility puzzle” using a new series of building permits, a forward-looking measure of economic activity. Our results suggest that the volatility of building permit growth largely explains the high level of stock volatility during the Great Depression. Markets factored in the possibility of a forthcoming economic disaster.
Keywords: stock volatility; Great Depression; building permits; economic activity; financial leverage
JEL Codes: G12; G17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Building permit growth volatility (L74) | Stock volatility (G17) |
| Financial leverage (G32) | Stock volatility (G17) |