Working Paper: NBER ID: w4627
Authors: Peter Rappoport; Eugene N. White
Abstract: In this paper, we re-examine the stock market of the 1920s and 1930s for evidence of a bubble, a 'fad' or 'herding' behavior by studying individual stock returns. One story often advanced for the boom of 1928 and 1929 is that it was driven by the entry into the market of largely uninformed investors, who followed the fortunes of and invested in 'favorite' stocks. The recent theoretical literature on how 'noise traders' perturb financial markets is consistent with this description. The result of this behavior would be a tendency for the favorite stocks' prices to move together more than would be predicted by their shared fundamentals. Our results suggest that there was excess comovement in returns even before the boom began, but comovement increased significantly during the boom and was a signal characteristic of the tumultuous market of the early 1930s. These results are thus consistent with the possibility that a fad or crowd psychology played a role in the rise of the market, its crash and subsequent volatility.
Keywords: stock market; 1920s; 1930s; herding behavior; bubble
JEL Codes: N22; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uninformed investors (G14) | excess comovement in stock returns (G10) |
| market sentiment (G10) | stock price fluctuations (G17) |
| uninformed trading (G14) | comovement of stock prices (G10) |