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Output, Political Uncertainty, and Stock Market Fluctuations: Germany, 1890 - 1940

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  • George Bittlingmayer

Abstract

The sources of stock volatility and especially higher volatility in recessions have puzzled financial economists. One explanation emerges from recent theoretical work that points to political and regulatory uncertainty as a source of output fluctuations. Since political uncertainty can also generate stock price volatility, its joint effects on stock prices and output may explain why stock volatility is correlated with output declines. Evidence from a part1cularly instructive natural experiment, the transition from Imperial to Weimar Germany, supports the view that stock price volatility reflects an uncertain political climate. Statistically, stock price volatility and the ultimate factors it represents play a major role in explaining the post-World-War-1 collapse of the German economy and subsequent output fluctuations. A doubling of stock volatility implies a decline of output of --0 to -15 percent.

Suggested Citation

  • George Bittlingmayer, 1995. "Output, Political Uncertainty, and Stock Market Fluctuations: Germany, 1890 - 1940," CESifo Working Paper Series 87, CESifo.
    • Handle: RePEc:ces:ceswps:_87
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    Cited by:

    1. Meyer, Bernd, 1996. "Are German stock and bond returns consistent with equilibrium asset pricing? A calibration exercise using recursive non-expected utility," Discussion Papers, Series II 300, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".

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