Scandinavian Working Papers in Economics

Discussion Papers on Economics,
University of Southern Denmark, Department of Economics

No 1/2022: The Great Margin Call: The Role of Leverage in the 1929 Stock Market Crash

Karol Borowiecki (), Michał Dzieliński () and Alexander Tepper ()
Additional contact information
Karol Borowiecki: Department of Economics, Postal: University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark
Michał Dzieliński: Stockholm Business School, Postal: Stockholm University, Kräftriket 3A, , 106 91, Stockholm, Sweden,
Alexander Tepper: Columbia University United States, Postal: Columbia University, Graduate School of Architecture,, Planning and Preservation, 1172 Amsterdam Ave, New York, NY 10027, USA

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.

Keywords: Leverage; financial crisis; stability ratio; great crash

JEL-codes: G01; G10; N22

Language: English

32 pages, February 23, 2022

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