The Effect of the Change in Call Loan Rates and Volatility on Stock Returns in 1929: An Empirical Study into a Determinant of the Great Depression
Date of Submission
Open Access Senior Thesis
Bachelor of Arts
2018 Amberish M Chitre
I investigate the effect of the change in call loan rates on stock returns during 1929. Call loan rates are the interest rates on borrowed funds to trade equity on a given exchange. It is estimated that 40% of stocks during this period were bought on margin. After a price decline comes a margin call, followed by a forced sales of securities, which leads to additional margin calls and future price declines. I regress daily excess returns on the change in daily call loan rates during 1929. In addition, I estimate volatility using an ARCH model and observe the previously understood negative relationship between volatility and stock prices. I find a statistically significant negative relationship between call loan rates and stock returns. Furthermore, I also find that changes in call loan rates are most influential on the manufacturing sector relative to the other 11 industries tested.
Chitre, Amberish, "The Effect of the Change in Call Loan Rates and Volatility on Stock Returns in 1929: An Empirical Study into a Determinant of the Great Depression" (2018). CMC Senior Theses. 1912.