TAILIEUCHUNG - OUTPUT, STOCK VOLATILITY, AND POLITICAL UNCERTAINTY IN A NATURAL EXPERIMENT: GERMANY, 1880-1940

As we can see, the findings of the little available work on GCC countries are contradictory. These findings are puzzling because the GCC countries are heavy oil exporters and have similar economic structures. Furthermore, the GCC economies are oil dependent and are thus sensitive to oil price changes. But previous results are based on country analysis and use time series data from relatively short periods. Our paper differs from previous studies by applying a recent bootstrap panel causality test to examine the relationship between oil and stock markets in GCC countries. . | THE JOURNAL OF FINANCE VOL. LIII NO. 6 DECEMBER 1998 Output Stock Volatility and Political Uncertainty in a Natural Experiment Germany 1880 1940 GEORGE BITTLINGMAYER ABSTRACT Why does stock volatility increase when output declines The theory of investment under uncertainty implies that political uncertainty may simultaneously increase volatility and reduce output. Though cause and effect are typically hard to separate the transition from Imperial to Weimar Germany offers a natural experiment because major political events left clear traces on stock prices. Current and past increases in volatility are associated with output declines consistent with . experience. However political events are more clearly the source of volatility and the results support the view that the relationship between volatility and output ref lects the joint effects of political factors. Why does stock volatility change over time and why is it higher in recessions Though the basic facts are well established Huang and Kracaw 1984 Schwert 1989a Romer 1990 Pindyck 1991a the causal link between volatility and business slumps is unclear. Slumps may cause volatility volatility may cause slumps or both may be the consequence of some other more clearly exogenous factor. Political uncertainty may represent such an exogenous factor. Consider the Great Depression in the United States. Major changes in economic policy occurred in the 1930s and even larger changes were a possibility. The highly volatile stock market of the 1930s may very well have reflected a nonnegli-gible fluctuating probability that the United States would go socialist. The same uncertainty about economic policy may also have caused a slump in business investment and reduced consumer spending. Though the explanation has appeal political uncertainty was not clearly exogenous. A critic could say that higher volatility and the radical nature of policy debate were consequences of the decline in output and the Depression itself had other

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