The Great Depression and the Great Recession: A View from Financial Markets
Similarities between the Great Depression and the Great Recession are documented with respect to the behavior of financial markets. A Great Depression regime is identified by using a Markov-switching VAR. The probability of this regime has remained close to zero for many decades, but spiked for a short period during the most recent financial crisis, the Great Recession. The Great Depression regime implies a collapse of the stock market, with small-growth stocks outperforming small-value stocks. A model with financial frictions and uncertainty about policy makers’ intervention suggests that policy intervention during the Great Recession might have avoided a second Great Depression. A multi-country analysis shows that the Great Depression and Great Recession were not like any other financial crises.
I am grateful to Chris Sims for his useful suggestions at the early stage of this work. I would like to thank Robert Barro, Markus Brunnermeier, John Campbell, Emmanuel Farhi, Andrew Foerster, Jakub Jurek, Ralph Koijen, Howard Kung, Alisdair McKay, Kristo¤er Nimark, Barbara Rossi, Motohiro Yogo, Adam Zawadowski, and seminar participants at the Annual Asset Pricing Retreat, Princeton University, Duke University, the Board of Governors of the FRS, the EEA-ESEM conference, the Bank of Italy, the University of Pisa, and the CEF Conference for helpful discussions and comments. Zhao Liu provided outstanding research assistance. A previous version of this paper circulated under the title “Rare Events, Financial Crises, and the Cross-Section of Asset Returns.” The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Francesco Bianchi, 2019. "The Great Depression and the Great Recession: A View from Financial Markets," Journal of Monetary Economics, .