The Economic History Review

The 1929 crash of the New York stock exchange as a liquidity crisis

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Authors: Jean-Laurent Cadorel
Published online: January 3, 2024DOI: 10.1111/ehr.13309

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What caused the 1929 crash of the New York Stock Exchange? This paper quantitatively studies liquidity during the 1929 crash of the NYSE. I evidence that the crash represented a liquidity crisis due to the liquidation of brokers’ margin loans. Applying recent estimators of effective spreads and liquidity conditions from contemporary finance literature suggests a four-fold increase in spreads during the crash at the aggregate level. At the individual stock level, quoted bid-ask spreads suggest that liquidity explains one-fifth of the variance in daily stock returns during the crash.

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