IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/3612.html
   My bibliography  Save this paper

Was there a bubble in the 1929 Stock Market?

Author

Listed:
  • 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.

Suggested Citation

  • Peter Rappoport & Eugene N. White, 1991. "Was there a bubble in the 1929 Stock Market?," NBER Working Papers 3612, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3612
    Note: ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w3612.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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(2), pages 265-281, June.
    2. 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.
    3. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    4. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    5. Joe Mattey and Richard Meese., 1986. "Empirical Assessment of Present Value Relations," Research Program in Finance Working Papers 162, University of California at Berkeley.
    6. 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.
    7. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    8. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-1088, October.
    9. Kenneth D. West, 1987. "A Specification Test for Speculative Bubbles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 553-580.
    10. Miron, Jeffrey A. & Romer, Christina D., 1990. "A New Monthly Index of Industrial Production, 1884–1940," The Journal of Economic History, Cambridge University Press, vol. 50(2), pages 321-337, June.
    11. 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.
    12. White, Halbert & Domowitz, Ian, 1984. "Nonlinear Regression with Dependent Observations," Econometrica, Econometric Society, vol. 52(1), pages 143-161, January.
    13. Behzad T. Diba & Herschel I. Grossman, 1987. "On the Inception of Rational Bubbles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 697-700.
    14. White, Eugene Nelson, 1986. "Before the Glass-Steagall Act: An analysis of the investment banking activities of national banks," Explorations in Economic History, Elsevier, vol. 23(1), pages 33-55, January.
    15. 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.
    16. 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.
    17. Durlauf, Steven N & Phillips, Peter C B, 1988. "Trends versus Random Walks in Time Series Analysis," Econometrica, Econometric Society, vol. 56(6), pages 1333-1354, November.
    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 545-552, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tim Bollerslev & Robert J. Hodrick, 1992. "Financial Market Efficiency Tests," NBER Working Papers 4108, National Bureau of Economic Research, Inc.
    2. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Intrinsic Bubbles: The Case of Stock Prices," American Economic Review, American Economic Association, vol. 81(5), pages 1189-1214, December.
    3. Peter C. B. Phillips & Yangru Wu & Jun Yu, 2011. "EXPLOSIVE BEHAVIOR IN THE 1990s NASDAQ: WHEN DID EXUBERANCE ESCALATE ASSET VALUES?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 201-226, February.
    4. Refet S. Gürkaynak, 2008. "Econometric Tests Of Asset Price Bubbles: Taking Stock," Journal of Economic Surveys, Wiley Blackwell, vol. 22(1), pages 166-186, February.
    5. Enrique Sentana, 1993. "The econometrics of the stock market I: rationality tests," Investigaciones Economicas, Fundación SEPI, vol. 17(3), pages 401-420, September.
    6. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    7. Gregory Connor & Lisa R. Goldberg & Robert A. Korajczyk, 2010. "Portfolio Risk Analysis," Economics Books, Princeton University Press, edition 1, number 9224.
    8. repec:zbw:bofism:2006_035 is not listed on IDEAS
    9. Taipalus, Katja, 2012. "Detecting asset price bubbles with time-series methods," Scientific Monographs, Bank of Finland, number 2012_047.
    10. Jiang, Xiaoquan & Lee, Bong-Soo, 2007. "Stock returns, dividend yield, and book-to-market ratio," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 455-475, February.
    11. Gonzalo, Jesús & González Rozada, Martín, 1996. "Non-exact present value relations," DES - Working Papers. Statistics and Econometrics. WS 4544, Universidad Carlos III de Madrid. Departamento de Estadística.
    12. Franses,Philip Hans & Dijk,Dick van & Opschoor,Anne, 2014. "Time Series Models for Business and Economic Forecasting," Cambridge Books, Cambridge University Press, number 9780521520911, December.
    13. Taipalus, Katja, 2006. "Bubbles in the Finnish and US equities markets," Scientific Monographs, Bank of Finland, number 35/2006.
    14. 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.
    15. repec:zbw:bofism:2012_047 is not listed on IDEAS
    16. Taipalus, Katja, 2012. "Detecting asset price bubbles with time-series methods," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number sm2012_047, December.
    17. Kinateder, Harald & Wagner, Niklas, 2017. "Quantitative easing and the pricing of EMU sovereign debt," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 1-12.
    18. Baffes, John & Gohou, Gaston, 2005. "The co-movement between cotton and polyester prices," Policy Research Working Paper Series 3534, The World Bank.
    19. Bao, Jack & Hou, Kewei & Zhang, Shaojun, 2023. "Systematic default and return predictability in the stock and bond markets," Journal of Financial Economics, Elsevier, vol. 149(3), pages 349-377.
    20. Hirukawa, Masayuki, 2023. "Robust Covariance Matrix Estimation in Time Series: A Review," Econometrics and Statistics, Elsevier, vol. 27(C), pages 36-61.
    21. Hecq, A.W. & Issler, J.V., 2012. "A common-feature approach for testing present-value restrictions with financial data," Research Memorandum 006, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    22. Josef Brada, Ali M. Kutan, 2002. "Balkan and Mediterranean Candidates for European Union Membership: The Convergence of Their Monetary Policy with That of the European Central Bank," Eastern European Economics, Taylor & Francis Journals, vol. 40(4), pages 31-44, July.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3612. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.