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The Bubble of 1929: Evidence from Closed-End Funds

  • J. Bradford De Long
  • Andrei Shleifer

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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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: Nov 1990
Date of revision:
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
Note: ME
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  1. 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.
  2. 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.
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