Working Paper: NBER ID: w8622
Authors: Ellen R. McGrattan; Edward C. Prescott
Abstract: In the fall of 1929, the market value of all shares listed on the New York Stock Exchange fell by 30 percent. Many analysts then and now take the view that stocks were then overvalued and the stock market was in need of a correction. Irving Fisher argued that the fundamentals were strong and the stock market was undervalued. In this paper, we estimate the fundamental value of corporate equity in 1929 using data on stocks of productive capital and tax rates as in McGrattan and Prescott (2000, 2001) and compare it to actual stock valuations. We find that the stock market in 1929 did not crash because the market was overvalued. In fact, the evidence strongly suggests that stocks were undervalued, even at their 1929 peak.
Keywords: No keywords provided
JEL Codes: E62; G12; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fundamental value of corporations influenced by productive capital stocks and tax rates (H32) | Market value of corporations (G32) |
| Fundamental value of US corporations estimated at 20 times after-tax corporate earnings (G32) | Actual market value below 19 times (G19) |
| Fundamental value exceeds market value (D46) | Misalignment in valuations (G19) |