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.
| Identifer | oai:union.ndltd.org:CLAREMONT/oai:scholarship.claremont.edu:cmc_theses-2977 |
| Date | 01 January 2018 |
| Creators | Chitre, Amberish |
| Publisher | Scholarship @ Claremont |
| Source Sets | Claremont Colleges |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | CMC Senior Theses |
| Rights | 2018 Amberish M Chitre, default |
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