Was the 1929 Crash of the NYSE indeed a liquidity crisis?
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.
What caused the liquidity crisis on the NYSE in 1929?
The crash of the New York Stock Exchange in October 1929 was a liquidity crisis caused by the liquidation of brokers’ margin loans. Based on high-frequency data and on rediscovered archival documents, this paper argues the Bank of England’s unexpected September discount rate rise was the trigger for the crash.
What was the yield curve of French government bonds since 1870?
The Agence France Trésor publishes the modern French Treasury yield curve in monthly frequency on its website. For historical data on the French yield curve, researchers rely on three studies with varying market coverage, frequency of observation, and time span. We lack long-run high-frequency yield curve estimates covering all French government bonds. This paper fills that gap by making public the French yield curve at a bi-weekly frequency from 1870 to the present.
Work in progress
What are the real effects of financial market crises as measured by shocks to credit spreads in France? (JMP)
Financial and credit markets do not affect the real economy apart for changes in the term structure of real interest rates in the canonical real business cycle model and the textbook Keynesian IS-LM models (Bernanke, Gertler and Gilchrist, 1998). As Gertler (1988) discusses, an alternative macroeconomic tradition beginning at least with Fisher and Keynes gives a more central role to credit markets. Credit markets can be a major factor depressing economic activity rather than simply reflecting the declining real economy.
The theoretical literature has incorporated credit markets by incorporating credit market frictions. Famous models include Bernanke, Gertler, and Gilchrist (1996)’s financial accelerator model whereby credit markets propagate and amplify shocks, for example, due to the effects of shocks on borrowers’ cash flows (Bernanke and Gertler, 1989). Alternatively, Kiyotaki and Moore (1997) develop a dynamic equilibrium model in which endogenous fluctuations in the market prices of assets are the main source of changes in borrowers’ net worth and hence in spending and production. A large theoretical literature followed.
In the empirical literature, the major works were published roughly after the 2008 crisis. Philippon (2009) shows using bond prices rather than equity prices fits the investment equation of the q-theory of investment six times better. Gilchrist, Yankov, and Zakrajsek (2009) build micro-level credit spreads rather than relying on aggregate Baa spreads. This approach allows them to construct matched portfolios of equity returns. The informational content in those credit spreads orthogonal to equity returns then has substantial predictive power for economic activity. In a subsequent paper, two of the authors provide a decomposition of credit spreads: they regress credit spreads on firm-specific and bond-specific characteristics, and they coin the term “excess bond premia” for the residuals (Gilchrist and Zakrajsek, 2012). Most of the predictive power of credit spreads is accounted for by movements in the excess bond premium. In Caldara, Fuentes-Albero, Gilchrist, and Zakrajsek (2016), the authors provide a structural interpretation of the shocks to the excess bond premium. They argue the excess bond premium measures the extra compensation demanded by bond investors for bearing exposure to corporate credit risk, beyond the compensation for expected losses (given the spreads were regressed on firm-specific characteristics capturing expected default). The excess bond premium “captures shifts in the risk attitudes of institutions and their willingness to bear credit risk and to intermediate credit more generally”. This willingness may be due to uncertainty or financial stress.
They then employ the penalty approach to jointly identify the effects of uncertainty and financial shocks. Brunnermeir, Palia, Sastry, and Sims (2021) find similar results using a Bayesian VAR. The previous papers were all focused on the United States and until the 1970s. Gilchrist and Mojon (2018) perform a similar exercise for the eurozone since 1999. No similar exercise has been conducted for a non-US country and in the long run. The contribution of this paper is to replicate Gilchrist and Zakrajsek (2012) for France in the long run.
This will provide estimates of the real effects of credit spreads (i) across monetary and inflation regimes, which is particularly relevant if we have truly entered a new high-inflation regime (ii) in a civil law country with a different set of institutions (iii) during periods of war and political instability (iv) in a country with old and important financial markets.