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The Great Margin Call: The Role of Leverage in the 1929 Stock Market Crash

Author

Listed:
  • Borowiecki, Karol

    (Department of Economics)

  • Dzieliński, Michał

    (Stockholm Business School)

  • Tepper, Alexander

    (Columbia University United States)

Abstract

The reasons for the Great Crash and why it occurred at that particular time are still debated among economic historians. We contribute to this debate by building on a new model developed by Adrian et al. (2021), which provides a measure of the financial system's potential for financial crises. The evidence suggests that a tightening of margin requirements in the first nine months of 1929 combined with price declines in September and early October caused enough many investors to become constrained that the market was tipped into instability, triggering the sudden crash of October and November.

Suggested Citation

  • Borowiecki, Karol & Dzieliński, Michał & Tepper, Alexander, 2022. "The Great Margin Call: The Role of Leverage in the 1929 Stock Market Crash," Discussion Papers on Economics 1/2022, University of Southern Denmark, Department of Economics.
    • Handle: RePEc:hhs:sdueko:2022_001
    as

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    File URL: https://www.sdu.dk/-/media/files/om_sdu/institutter/ivoe/econ/the+great+margin+call.pdf
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    References listed on IDEAS

    as
    1. Adrian, Tobias & Borowiecki, Karol Jan & Tepper, Alexander, 2022. "A leverage-based measure of financial stability," Journal of Financial Intermediation, Elsevier, vol. 51(C).
    2. Christina D. Romer, 1990. "The Great Crash and the Onset of the Great Depression," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(3), pages 597-624.
    3. Quinn,William & Turner,John D., 2021. "Boom and Bust," Cambridge Books, Cambridge University Press, number 9781108431651, January.
    4. Jun Liu, 2004. "Losing Money on Arbitrage: Optimal Dynamic Portfolio Choice in Markets with Arbitrage Opportunities," The Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 611-641.
    5. William Quinn & John D. Turner, 2023. "Bubbles in history," Business History, Taylor & Francis Journals, vol. 65(4), pages 636-655, May.
    6. Grossman, Sanford J. & Vila, Jean-Luc, 1992. "Optimal Dynamic Trading with Leverage Constraints," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(2), pages 151-168, June.
    7. Bordo, Michael & James, Harold, 2010. "The Great Depression analogy1," Financial History Review, Cambridge University Press, vol. 17(2), pages 127-140, October.
    8. Mathy, Gabriel P., 2016. "Stock volatility, return jumps and uncertainty shocks during the Great Depression," Financial History Review, Cambridge University Press, vol. 23(2), pages 165-192, August.
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    More about this item

    Keywords

    Leverage; financial crisis; stability ratio; great crash;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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