NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Was there a bubble in the 1929 Stock Market?

Peter Rappoport, Eugene N. White

NBER Working Paper No. 3612
Issued in February 1991
NBER Program(s):   ME

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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Document Object Identifier (DOI): 10.3386/w3612

Published: Journal of Economic History, vol. 53, no. 3 (September 1993), pp. 549-574

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