Stock Price Volatility and Political Uncertainty: Evidence from the Interwar Period

41 Pages Posted: 18 Mar 2002

See all articles by Hans-Joachim Voth

Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society; Centre for Economic Policy Research (CEPR)

Date Written: February 2002

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. I show that political risks themselves changed dramatically over the period, and are sufficient to account for a large part of the increase in volatility during the Great Depression. This conclusion is robust to a number of alternative specifications. I derive rolling estimates of the risk of revolution, and demonstrate that the strong reaction to incidents of worker militancy such as strikes and riots can be rationalized as a sensible reaction to the risk of expropriation.

Keywords: Stock price volatility, political uncertainty, worker militancy, Great Depression

JEL Classification: G12, G14, G18, E66, N22, N24, N12, N14

Suggested Citation

Voth, Hans-Joachim, Stock Price Volatility and Political Uncertainty: Evidence from the Interwar Period (February 2002). MIT Department of Economics Working Paper No. 02-09; AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=302926 or http://dx.doi.org/10.2139/ssrn.302926

Hans-Joachim Voth (Contact Author)

University of Zurich - UBS International Center of Economics in Society ( email )

Raemistrasse 71
Zuerich, 8006
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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