Was There a Bubble in the 1929 Stock Market?, Issue 3612
National Bureau of Economic Research, 1991 - Brokers' loans - 35 pages
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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1929 STOCK MARKET additive bubble augmented Dickey-Fuller Augmented Dickey-Fuller Test bankers banks behavior of stock brokerage bubble bursts bubble component bubble estimates bubble in stock Bubble Model bubble path bubble term bubbxe Bureau of Economic calculated call loans call rate capture ceteris paribus collateral crash critical values customers default described Diba and Grossman Dice differences of stock distributed lag Economic Research Equations 10a Figure fundamentals instrumental variable interest rates inventories of securities joint behavior large event lender loan rate equation loan rate model margin calls margin loans margin requirements market for brokers market rate money desk monthly model multiplicative bubble NBER objective function parameters percent Phillips-Perron test premia presence of bubbles prices and dividends prior quarter quarterly data quarterly model rates on brokers rational bubbles residuals risk premium serial correlation standard errors stock market boom stock prices suggest sxapow t-statistic Table unit root York Stock Exchange