Working Paper: NBER ID: w3523
Authors: J. Bradford De Long; Andrei Shleifer
Abstract: 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.
Keywords: closed-end funds; 1929 bubble; investor sentiment
JEL Codes: G12; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investor sentiment (G41) | Closed-end fund premiums (G23) |
| Closed-end fund premiums (G23) | Stock prices (G19) |
| Investor sentiment (G41) | Stock prices (G19) |
| Closed-end fund discounts (G23) | Investor sentiment (G41) |
| Stock prices (G19) | Overvaluation (F31) |