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Was there a bubble in the 1929 Stock Market?

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  • Peter Rappoport
  • Eugene N. White

Abstract

Standard tests find that no bubbles are present in the stock price data for the last one hundred years. In contrast., historical accounts, focusing on briefer periods, point to the stock market of 1928-1929 as a classic example of a bubble. While previous studies have restricted their attention to the joint behavior of stock prices and dividends over the course of a century, this paper uses the behavior of the premia demanded on loans collateralized by the purchase of stocks to evaluate the claim that the boom and crash of 1929 represented a bubble. We develop a model that permits us to extract an estimate of the path of the bubble and its probability of bursting in any period and demonstrate that the premium behaves as would be expected in the presence of a bubble in stock prices. We also find that our estimate of the bubble's path has explanatory power when added to the standard cointegrating regressions of stock prices and dividends, in spite of the fact that our stock price and dividend series are cointegrated.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3612.

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Date of creation: Feb 1991
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Publication status: published as Journal of Economic History, vol. 53, no. 3 (September 1993), pp. 549-574
Handle: RePEc:nbr:nberwo:3612

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  1. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. West, Kenneth D, 1987. "A Specification Test for Speculative Bubbles," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(3), pages 553-80, August.
  3. Christina Romer & Jeffrey A. Miron, 1989. "A New Monthly Index of Industrial Production, 1884-1940," NBER Working Papers 3172, National Bureau of Economic Research, Inc.
  4. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
  5. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(5), pages 1062-88, October.
  6. Dominguez, Kathryn M & Fair, Ray C & Shapiro, Matthew D, 1988. "Forecasting the Depression: Harvard versus Yale," American Economic Review, American Economic Association, vol. 78(4), pages 595-612, September.
  7. Diba, Behzad T & Grossman, Herschel I, 1987. "On the Inception of Rational Bubbles," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(3), pages 697-700, August.
  8. White, Eugene Nelson, 1986. "Before the Glass-Steagall Act: An analysis of the investment banking activities of national banks," Explorations in Economic History, Elsevier, Elsevier, vol. 23(1), pages 33-55, January.
  9. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
  10. Robert P. Flood & Robert J. Hodrick, 1989. "Testable Implications of Indeterminacies in Models with Rational Expectations," NBER Working Papers 2903, National Bureau of Economic Research, Inc.
  11. Peter C.B. Phillips & Pierre Perron, 1986. "Testing for a Unit Root in Time Series Regression," Cowles Foundation Discussion Papers 795R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1987.
  12. White, Halbert & Domowitz, Ian, 1984. "Nonlinear Regression with Dependent Observations," Econometrica, Econometric Society, Econometric Society, vol. 52(1), pages 143-61, January.
  13. Joe Mattey and Richard Meese., 1986. "Empirical Assessment of Present Value Relations," Research Program in Finance Working Papers, University of California at Berkeley 162, University of California at Berkeley.
  14. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
  15. Durlauf, Steven N & Phillips, Peter C B, 1988. "Trends versus Random Walks in Time Series Analysis," Econometrica, Econometric Society, Econometric Society, vol. 56(6), pages 1333-54, November.
  16. Jaffee, Dwight M., 1975. "Cyclical variations in the risk structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 1(3), pages 309-325, July.
  17. Barsky, Robert B. & Long, J. Bradford De, 1990. "Bull and Bear Markets in the Twentieth Century," The Journal of Economic History, Cambridge University Press, vol. 50(02), pages 265-281, June.
  18. Hamilton, James D, 1986. "On Testing for Self-fulfilling Speculative Price Bubbles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 545-52, October.
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Citations

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Cited by:
  1. Albrecht Ritschl & Monique Ebell, 2007. "Real Origins of the Great Depression: Monopoly Power, Unions and the American Business Cycle in the 1920s," 2007 Meeting Papers, Society for Economic Dynamics 712, Society for Economic Dynamics.
  2. Ozan Hatipoglu & Onur Uyar, 2012. "Do Bubbles Spill Over? Estimating Financial Bubbles in Emerging Markets," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 48(S5), pages 64-75, November.
  3. Eugene N. White, 2006. "Bubbles and Busts: The 1990s in the Mirror of the 1920s," NBER Working Papers 12138, National Bureau of Economic Research, Inc.
  4. Jon D. Wisman, 2013. "Labor Busted, Rising Inequality and the Financial Crisis of 1929: An Unlearned Lesson," Working Papers, American University, Department of Economics 2013-07, American University, Department of Economics.
  5. Caetano, Marco Antonio Leonel & Yoneyama, Takashi, 2009. "A new indicator of imminent occurrence of drawdown in the stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(17), pages 3563-3571.
  6. Nuriddin Ikromov & Abdullah Yavas, 2012. "Cash Flow Volatility, Prices and Price Volatility: An Experimental Study," The Journal of Real Estate Finance and Economics, Springer, vol. 44(1), pages 203-229, January.
  7. Ahmad, Mahyudin, 2012. "Duration dependence test for rational speculative bubble: the strength and weakness," MPRA Paper 42156, University Library of Munich, Germany.
  8. Albrecht Ritschl, 2012. "War 2008 das neue 1929? Richtige und falsche Vergleiche zwischen der Großen Depression der 1930er Jahre und der Großen Rezession von 2008," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 13, pages 36-57, 05.
  9. John R. Conlon, 2008. "Should Central Banks Burst Bubbles? Some Microeconomic Issues," Levine's Working Paper Archive 122247000000002330, David K. Levine.
  10. Crafts, Nicholas; Fearon, Peter, 2010. "Lessons from the 1930s' Great Depression," CAGE Online Working Paper Series 23, Competitive Advantage in the Global Economy (CAGE).
  11. Caetano, Marco Antonio Leonel & Yoneyama, Takashi, 2012. "A method for detection of abrupt changes in the financial market combining wavelet decomposition and correlation graphs," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(20), pages 4877-4882.
  12. Georgakopoulos, Nicholas L., 1996. "Why should disclosure rules subsidize informed traders?," International Review of Law and Economics, Elsevier, vol. 16(4), pages 417-431, December.
  13. Charles, Amélie & Darné, Olivier, 2014. "Large shocks in the volatility of the Dow Jones Industrial Average index: 1928–2013," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 188-199.
  14. 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.
  15. Zhiguo He & Wei Xiong, 2010. "Financing Speculative Booms," Levine's Working Paper Archive 661465000000000327, David K. Levine.
  16. Charles W. Calomiris, 1993. "Financial Factors in the Great Depression," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 61-85, Spring.
  17. repec:pra:mprapa:37980 is not listed on IDEAS
  18. Campbell, Gareth & Turner, John, 2010. "‘The Greatest Bubble in History’: Stock Prices during the British Railway Mania," MPRA Paper 21820, University Library of Munich, Germany.
  19. Saumitra, Bhaduri, 2012. "Applying approximate entropy (ApEn) to speculative bubble in the stock market," MPRA Paper 38015, University Library of Munich, Germany.

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