Stock volatility and the Great Depression

Author / Creator

Cortes, Gustavo S., author

Available as

Online

Summary

Stock volatility during the Great Depression was two to three times higher than any other period in American financial history. The period has been labelled a "volatility puzzle" because scholars h...

Stock volatility during the Great Depression was two to three times higher than any other period in American financial history. The period has been labelled a "volatility puzzle" because scholars have been unable to provide a convincing explanation for the dramatic rise in stock volatility (Schwert, 1989). We investigate the volatility puzzle during the period 1928-1938 using a new series of building permits, a forward-looking measure of economic activity. Our results suggest that the largest stock volatility spike in American history can be predicted by an increase in the volatility of building permit growth. Markets appear to have factored in a forthcoming economic disaster.

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