Skip to main content Accessibility help
×
×
Home

Stock volatility, return jumps and uncertainty shocks during the Great Depression

  • Gabriel P. Mathy (a1)

Abstract

There are a multitude of explanations for the depth and length of the Great Depression, of which uncertainty has been proposed as one possible explanation (Romer 1990). The 1930s not only saw extreme declines in output and prices, but stock volatility was also at record highs (Schwert 1989). This high stock volatility was generated by a series of discontinuous jumps as news about uncertainty arrived regularly during the 1930s, as shown by applying the Barndorff-Nielsen and Shephard (2006) test for jumps in a time-series. To provide a more historical narrative for these jumps, I outline some key events during the Great Depression that generated a sense of uncertainty for businesses and households which occurred contemporaneously to these extreme jumps. While much of the literature has placed Roosevelt's New Deal as a primary source of uncertainty, I do not find much evidence for this hypothesis, and instead find that banking crises, the breakdown of the gold standard, popular unrest and uncertainty related to the brewing war in Europe were primarily responsible for both jumps in returns and the uncertainty of the 1930s.

  • View HTML
    • Send article to Kindle

      To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

      Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

      Find out more about the Kindle Personal Document Service.

      Stock volatility, return jumps and uncertainty shocks during the Great Depression
      Available formats
      ×

      Send article to Dropbox

      To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

      Stock volatility, return jumps and uncertainty shocks during the Great Depression
      Available formats
      ×

      Send article to Google Drive

      To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

      Stock volatility, return jumps and uncertainty shocks during the Great Depression
      Available formats
      ×

Copyright

Corresponding author

G. P. Mathy, American University, 4400 Massachusetts Avenue NW, Washington, DC 20016, USA; email: mathy@american.edu.

References

Hide All
The Annalist: A Magazine of Finance, Commerce and Economics. New York: New York Times Co.
Commercial and Financial Chronicle
New York Times
Wall Street Journal
Abel, A. B., Dixit, A., Eberly, J. C. and Pindyck, R. S. (1996). Options, the value of capital, and investment. Quarterly Journal of Economics, 111, pp. 753–77.
Andersen, T. G., Dobrev, D. and Schaumburg, E. (2012). Jump-robust volatility estimation using nearest neighbor truncation. Journal of Econometrics, 169, pp. 7593.
Archibald, R. B. and Feldman, D. H. (1998). Investment during the Great Depression: uncertainty and the role of the Smoot-Hawley tariff. Southern Economic Journal, 68, pp. 857–79.
Baker, S. R. and Bloom, N. (2013). Does uncertainty reduce growth? Using disasters as natural experiments. National Bureau of Economic Research Working Paper no. 19475.
Baker, S. R., Bloom, N. and. Davis, S. J. (2015). Measuring economic policy uncertainty. National Bureau of Economic Research Working Paper no. 21633.
Barndorff-Nielsen, O. E. and Shephard, N. (2004). Power and bipower variation with stochastic volatility and jumps. Journal of Financial Econometrics, 2, pp. 137.
Barndorff-Nielsen, O. E. and Shephard, N. (2006). Econometrics of testing for jumps in financial economics using bipower variation. Journal of Financial Econometrics, 4, pp. 130.
Bernanke, B. S. (1983). Irreversibility, uncertainty, and cyclical investment. Quarterly Journal of Economics, 98, pp. 85106.
Bloom, N. (2009). The impact of uncertainty shocks. Econometrica, 77, pp. 623–85.
Bloom, N. (2013). Fluctuations in uncertainty. National Bureau of Economic Research Working Paper.
Bloom, N., Bond, S. and Van Reenen, J. (2007). Uncertainty and investment dynamics. Review of Economic Studies, 74, 391415.
Caballero, R. J. and. Pindyck, R. S (1996). Uncertainty, investment, and industry evolution. International Economic Review, 37, pp. 641–62.
Calomiris, C. W., Mason, J. and Wheelock, D. (2011). Did doubling reserve requirements cause the recession of 1937–1938? A microeconomic approach. National Bureau of Economic Research Working Paper no. 16688.
Cargill, T. F. and Mayer, T. (2006). The effect of changes in reserve requirements during the 1930s: The evidence from nonmember banks. Journal of Economic History, 66, pp. 417–32.
Charles, A. and Darné, O. (2014). Large shocks in the volatility of the Dow Jones Industrial Average index: 1928–2013. Journal of Banking & Finance, 43, pp. 188–99.
Chicu, M., Vickers, C. and Ziebarth, N. L. (2013). Cementing the case for collusion under the National Recovery Administration. Explorations in Economic History, 50, pp. 487507.
Claus, E. and Dungey, M. (2016). Can monetary policy surprises affect the term structure? Journal of Macroeconomics, 47, pp. 6883.
Cogley, T. and Sargent, T. J. (2008). The market price of risk and the equity premium: a legacy of the Great Depression? Journal of Monetary Economics, 55, pp. 454–76.
Cole, H. L. and Ohanian, L. E. (1999). The Great Depression in the United States from a neoclassical perspective. Federal Reserve Bank of Minneapolis Quarterly Review, 23, pp. 224.
Cole, H. L. and Ohanian, L. E. (2001). Re-examining the contributions of money and banking shocks to the US Great Depression. NBER Macroeconomics Annual, 15, pp. 183260.
Cole, H. L. and Ohanian, L. E. (2004). New Deal policies and the persistence of the Great Depression: a general equilibrium analysis. Journal of Political Economy, 112, pp. 779816.
Cowley, M. (1981). Dream of the Golden Mountains. New York: Penguin Books.
Dickson, P. and Allen, T. B. (2006). The Bonus Army: An American Epic. New York: Walker & Co.
Dixit, A. (1992). Investment and hysteresis. Journal of Economic Perspectives, 6, pp. 107–32.
Dixit, A. (1993). Art of Smooth Pasting. London and New York: Routledge.
Dixit, A. and Goldman, S. M. (1970). Uncertainty and the demand for liquid assets. Journal of Economic Theory, 2, pp. 368–82.
Dixit, A. and Pindyck, R. S. (1994). Investment under Uncertainty. Princeton: Princeton University Press.
Dungey, M. and Gajurel, D. (2014). Equity market contagion during the global financial crisis: evidence from the world's eight largest economies. Economic Systems, 38, pp. 161–77.
Dungey, M. and Hvozdyk, L. (2012). Cojumping: evidence from the US Treasury bond and futures markets. Journal of Banking & Finance, 36, pp. 1563–75.
Dungey, M. and Martin, V. L. (2007). Unravelling financial market linkages during crises. Journal of Applied Econometrics, 22, pp. 89119.
Dungey, M., McKenzie, M. and Smith, L. V. (2009). Empirical evidence on jumps in the term structure of the US Treasury market. Journal of Empirical Finance, 16, pp. 430–45.
Eggertsson, G. B. (2008). Great expectations and the end of the Depression. American Economic Review, 98, pp. 14761516.
Eggertsson, G. B. (2010). A reply to Steven Horwitz's Commentary on Great Expectations and the End of the Depression . Econ Journal Watch, 7, pp. 197204.
Eggertsson, G. B. and Pugsley, B. (2006). The mistake of 1937: a general equilibrium analysis. Monetary and Economic Studies, 24, pp. 151–90.
Eichengreen, B. (1988). Did international economic forces cause the Great Depression? Contemporary Economic Policy, 6, pp. 90114.
Eichengreen, B. (1996): Golden Fetters: The Gold Standard and the Great Depression, 1919–1939. Oxford: Oxford University Press.
Ellsberg, D. (1961). Risk, ambiguity, and the savage axioms. Quarterly Journal of Economics, 75, pp. 643–69.
Fellmeth, A. X. (1996). Divorce waiting to happen: Franklin Roosevelt and the law of neutrality, 1935–1941. Buffalo Journal of International Law, 3, pp. 413541.
Ferderer, J. P. and Zalewski, D. A. (1999). To raise the golden anchor? Financial crises and uncertainty during the Great Depression. Journal of Economic History, 59 (3), pp. 624–58.
Friedman, M. and Schwartz, A. J. (1971) A Monetary History of the United States, 1867–1960. Princeton, NJ: Princeton University Press.
Hamilton, J. D. (1987). Monetary factors in the Great Depression. Journal of Monetary Economics, 19, pp. 145–69.
Hamilton, J. D. (1992). Was the deflation during the Great Depression anticipated? Evidence from the commodity futures market. American Economic Review, 82, pp. 157–78.
Hendricks, H. (1936). The surtax on undistributed profits of corporations. Yale Law Journal, 46, pp. 1951.
Higgs, R. (1997). Regime uncertainty: why the Great Depression lasted so long and why prosperity resumed after the war. Independent Institute Working Paper.
Hoover, H. (1931). Letter to George Harrison, Federal Reserve Bank of New York. 5 October.
Hoover, H. (1952) Memoirs: The Great Depression, 1929–1941, vol. 3. New York: Macmillan.
Ilut, C. L. and Schneider, M. (2014). Ambiguous business cycles. American Economic Review, 104, pp. 2368–99.
Knight, F. H. (2012). Risk, Uncertainty and Profit. New York: Courier Corporation.
Kou, S. G. (2002). A jump-diffusion model for option pricing. Management Science, 48, pp. 1086–101.
Krepps, M. B. (1997). Another look at the impact of the National Industrial Recovery Act on cartel formation and maintenance costs. Review of Economics and Statistics, 79, pp. 151–4.
Lee, S. S. and. Mykland, P. A (2008). Jumps in financial markets: a new nonparametric test and jump dynamics. Review of Financial Studies, 21, pp. 2535–63.
Lisio, D. J. (1967). A blunder becomes catastrophe: Hoover, the legion, and the bonus army. Wisconsin Magazine of History, 51, pp. 3750.
Lowenthal, M. M. (1981). Roosevelt and the coming of the war: the search for United States policy 1937–42. Journal of Contemporary History, 16, pp. 413–40.
Maheu, J. M. and McCurdy, T. H. (2004). News arrival, jump dynamics, and volatility components for individual stock returns. Journal of Finance, 59, pp. 755–93.
Majd, S. and Pindyck, R. S. (1987). Time to build, option value, and investment decisions. Journal of Financial Economics, 18, pp. 727.
Mancini, C. and Renò, R. (2011). Threshold estimation of Markov models with jumps and interest rate modeling. Journal of Econometrics, 160, pp. 7792.
Maney, P. J. (1998). The Roosevelt Presence: The Life and Legacy of FDR. Berkeley: University of California Press.
McDonald, R. and Siegel, D. (1986). The value of waiting to invest. Quarterly Journal of Economics, 101, pp. 707–27.
Merton, R. C. (1976). Option pricing when underlying stock returns are discontinuous. Journal of Financial Economics, 3, 125–44.
Merton, R. C (1985). On the current state of the stock market rationality hypothesis. Massachusetts Institute of Technology Working Paper.
Mourè, K. (2002). The Gold Standard Illusion: France, the Bank of France, and the International Gold Standard, 1914–1939. Oxford: Oxford University Press.
Officer, R. R. (1973). The variability of the market factor of the New York Stock Exchange. Journal of Business, 46, pp. 434–53.
Park, H. and Horn, P. (2015). Did the reserve requirement increases of 1936–37 reduce bank lending? Evidence from a quasi-experiment. Journal of Money, Credit and Banking, 47, pp. 791818.
Perry, H. D. (1969). The Panay Incident: Prelude to Pearl Harbor. New York: Macmillan.
Pindyck, R. S. (1988). Irreversible investment, capacity choice, and the value of the firm. American Economic Review, 78, pp. 969–85.
Pindyck, R. S (1991). Irreversibility, uncertainty, and investment. Journal of Economic Literature, 29, pp. 1110–18.
Pindyck, R. S (1993). Investments of uncertain cost. Journal of Financial Economics, 34, pp. 5376.
Romer, C. D. (1990). The great crash and the onset of the Great Depression. Quarterly Journal of Economics, 105, pp. 597624.
Romer, C. D. (1992). What ended the Great Depression? Journal of Economic History, 52, pp. 757–84.
Roose, K. D. (1969). The Economics of Recession and Revival. Hamden, CT: Archon Books.
Schlesinger, A. M. (2003a). The Coming of the New Deal, 1933–1935. New York: Mariner Books.
Schlesinger, A. M. (2003b). The Politics of Upheaval, 1935–1936. New York: Mariner Books.
Schwert, G. W. (1989). Business cycles, financial crises, and stock volatility. Carnegie-Rochester Conference Series on Public Policy, 31, pp. 83125.
Svensson, L. E. (2001). The zero bound in an open economy: a foolproof way of escaping from a liquidity trap. Monetary and Economic Studies, 19, pp. 277312.
Taylor, J. E. and Klein, P. G. (2008). An anatomy of a cartel: the national industrial recovery act of 1933 and the compliance crisis of 1934. Research in Economic History, 26, pp. 235–71.
Telser, L. G. (2001). Higher member bank reserve ratios in 1936 and 1937 did not cause the relapse into depression. Journal of Post Keynesian Economics, 24, pp. 205–16.
Temin, P. and Wigmore, B. A. (1990). The end of one big deflation. Explorations in Economic History, 27, 483502.
Vavra, J. S. (2013). Inflation dynamics and time-varying volatility: new evidence and an S's interpretation. National Bureau of Economic Research Working Paper no. 19148.
Veronesi, P. (1999). Stock market overreactions to bad news in good times: a rational expectations equilibrium model. Review of Financial Studies, 12, pp. 9751007.
Voth, H.-J. (2002). Stock price volatility and political uncertainty: evidence from the interwar period. Massachusetts Institute of Technology Working Paper.
Wicker, E. (1971). Roosevelt's 1933 monetary experiment. Journal of American History, 57, pp. 864–79.
Wicker, E. (2001). The Banking Panics of the Great Depression. Cambridge: Cambridge University Press.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Financial History Review
  • ISSN: 0968-5650
  • EISSN: 1474-0052
  • URL: /core/journals/financial-history-review
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords

JEL classification

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed