The Bubble of 1929: Evidence from Closed-End Funds
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.
|Date of creation:||Nov 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.|
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- 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.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, .
"Noise Trader Risk in Financial Markets,"
J. Bradford De Long's Working Papers
_124, University of California at Berkeley, Economics Department.
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