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The Bubble of 1929: Evidence from Closed-End Funds

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  • J. Bradford De Long
  • Andrei Shleifer

Abstract

Closed-end mutual funds provide one of the few cases in which economists can observe "fundamental" values directly, and compare them to market values: the fundamental value of a closed-end fund is simply the net asset value of its portfolio. We use the difference between prices and asset values of closed-end funds at the end of the 1920s as a measure of investment sentiment. In the late l920s closed-end funds sold at large premia: at the peak, they appear willing to pay 60 percent more for closed-end funds than the post-WWII norm. Such substantial overpricing of closed-end funds -- where fundamentals are known and observed -- suggests that other assets were selling at prices above fundamentals as well. The association between movements in the medium closed-end fund discount and movements in broad stock price indices leads us to conclude that the stocks making up the S & P composite were priced at least 30 percent above fundamentals in the summer of 1929.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3523.

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Date of creation: Dec 1990
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Publication status: published as Reprinted in Eugene N. White, ed., "Stock Market Crashes and Speculative Manias," The International Library of Macroeconomic and Financial History, vol. 13, An Elger Reference Collection, 1996.
Handle: RePEc:nbr:nberwo:3523

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  1. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  2. Robert B. Barsky & J. Bradford De Long, 1989. "Bull and Bear Markets in the Twentieth Century," NBER Working Papers 3171, National Bureau of Economic Research, Inc.
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Cited by:
  1. John Simon, 2003. "Three Australian Asset-price Bubbles," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
  2. Georgakopoulos, Nicholas L., 1996. "Why should disclosure rules subsidize informed traders?," International Review of Law and Economics, Elsevier, Elsevier, vol. 16(4), pages 417-431, December.

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